Federal Register / Vol. 65, No. 105 / Wednesday, May 31, 2000 / Rules and Regulations 34581

the compact commission documentation

that the producer milk production

during the refund year is less than or the

increase is not more than 1% of the milk

production of the preceding calendar

year. Such documentation shall be filed

with the commission not later than 45

days after the end of the refund year.

(b) The commission will make

payment to all producers qualified

pursuant to § 1309.1 and eligible

pursuant to paragraph (a) of this section

in the following manner:

(1) A per farm payment computed by

dividing the amount subtracted

pursuant to § 1309.2(b) by the total

eligible producers; and

(2) The value determined by

multiplying the supply management

refund price computed pursuant to

§ 1309.2(e) by the producer’s milk

pounds, not to exceed $12,000.

Dated: May 24, 2000.

Kenneth M. Becker,

Executive Director.

[FR Doc. 00–13507 Filed 5–30–00; 8:45 am]

BILLING CODE 1650–01–P

NATIONAL CREDIT UNION

ADMINISTRATION

12 CFR Part 714

Leasing

AGENCY: National Credit Union

Administration (NCUA).

ACTION: Final rule.

SUMMARY: The final leasing rule 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 (FCUs)

to engage in either direct or indirect

leasing and either open-end or closedend leasing of personal property to their

members if such leasing arrangements

are the functional equivalent of secured

loans. In addition, the final rule

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: This rule is effective June 30,

2000.

FOR FURTHER INFORMATION CONTACT: Paul

M. Peterson, Staff Attorney, Division of

Operations, Office of the General

Counsel, (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 FCUs may lease

personal property to their members if

the leasing of the personal property is

the functional equivalent of secured

lending. In 1997, the NCUA Board

determined that IRPS 83–3 would be

better suited as a regulation. 62 FR

11773 (March 13, 1997). In 1998, the

Board issued a notice of proposed

rulemaking (NPRM) and request for

comment on leasing. 63 FR 57950

(October 29, 1998). The Board evaluated

the comments received and

incorporated many of the suggested

changes. Due to these changes to the

original proposed leasing regulation, the

Board issued a second NPRM and

request for comment. 64 FR 55866

(October 15, 1999). The comment period

for the second NPRM expired on

December 17, 1999.

B. Comments

NCUA received twelve comments on

the second proposed leasing regulation.

Comments were received from three

federal credit unions, two credit union

trade associations, four credit union

leagues, one bank trade association, one

insurance company, and one leasing

company. In general, the commenters

support the rule, although most

commenters suggest modifications.

Those commenters who compared the

second proposed rule to the first think

the second proposal is an improvement.

Specific comments are addressed in the

section-by-section analysis below.

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, nontechnical 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.

D. Section-by-Section Analysis

This analysis contains a section-bysection summary of the second

proposed rule; discusses the comments

received on each section, if any; and

describes any changes made as a result

of those comments. The phrase

‘‘proposed section’’ as used below refers

to draft language in the second NPRM.

Section 714.1—What Does This Part

Cover?

Proposed § 714.1 stated that part 714

covers the standards and requirements

that an FCU must follow when engaged

in the lease financing of personal

property. We received no comments and

made no changes in the final rule.

Section 714.2—What are the Permissible

Leasing Arrangements?

Proposed § 714.2 stated that FCUs

may engage in direct or indirect leasing,

and closed-end or open-end leasing.

Proposed § 714.2(c) provides ‘‘[i]n 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.’’ Proposed

§ 714.2(d) provides that for a closed-end

lease the FCU assumes the risk and

responsibility for that same difference.

Two commenters note that any

excessive wear and tear on the leased

property will be included in the

difference between the estimated

residual value and the actual value of

the property at lease end so that the

proposed rule apparently assigns the

responsibility for excessive wear and

tear differently depending on whether

the lease is open-end or closed-end. One

of these commenters suggests that

§ 714.2 be modified to place the risk and

responsibility for excess wear and tear

on the lessor FCU, regardless of the form

of leasing. The other commenter

suggests that the responsibility for

excess wear and tear should always be

with the member lessee.

As stated in the preamble to IRPS 83–

3, the lessee is always responsible for a

decrease in value due to excessive wear

and tear. The lessee, with possession of

the leased property, is in the best

position to protect the property from

excess wear and tear regardless of

whether the lease is open-end or closed

end. Accordingly, the Board amends

§ 714.2(d) to clarify that, in closed-end

leasing, the member lessee will be

responsible for excessive wear and tear

and the FCU will be responsible for the

remainder of the difference between the

estimated residual value and the actual

value. Proposed § 714.2(c) on open-end

leasing already places the responsibility

for excessive wear and tear on the

member lessee and needs no

modification in the final rule.

The following example illustrates the

allocation of risks in closed-end leasing.

Assume you, an FCU, lease a $12,000

car under a closed-end leasing

arrangement. At lease inception, the car

has an estimated residual value of

$3,000. The lease is not covered by any

34582 Federal Register / Vol. 65, No. 105 / Wednesday, May 31, 2000 / Rules and Regulations

residual value insurance or third-party

guarantee. Assume further that, during

the term of the lease, the used car

market for this particular make and

model softens. When the car is returned

at the end of the lease, you sell it at

public auction for only $2,000, which is

$1,000 less than your estimated residual

value. If the car suffers from normal

wear and tear, you are responsible for

the entire difference between the

estimated residual value and the actual

residual value. If, however, excess wear

and tear reduced the car’s actual

residual value by $500, the member will

be responsible for $500 and you will be

responsible only for the remaining $500

of residual value loss.

Section 714.3—Must You Own the

Leased Property in an Indirect Leasing

Arrangement?

Proposed § 714.3 stated that an FCU

does not have to own the leased

property in an indirect leasing

arrangement if the FCU: (1) Receives a

full assignment of the lease; (2) is

named as the sole lienholder of the

property; (3) enters into a security

agreement with the leasing company to

protect the FCU’s lien on the property;

and (4) takes all necessary steps to

record and perfect the security interest.

One commenter supports the full

assignment requirement. Three other

commenters believe that the full

assignment of the lease is unnecessary

and decisions about how much of the

lease should be assigned are best left to

the discretion of the FCU. One of these

three commenters noted that the Office

of the Comptroller of the Currency

(OCC) has no full assignment

requirement in its leasing rules for

national banks, and another argued that

full assignment was unnecessary if the

FCU ‘‘can protect its interest by

possession.’’ The commenters opposed

to full assignment did not specify any

particular harm to FCUs arising from the

requirement. Also, the Board notes that

the one leasing company that

commented on the second NPRM stated

that full assignment was ‘‘unnecessary

but not objectionable.’’ (emphasis

added).

The final rule leaves the full

assignment requirement intact. The full

assignment requirement stems from two

main concerns. First, in the event of a

leasing company’s bankruptcy, the

failure to obtain a complete assignment

of the lease may permit the bankruptcy

trustee to argue that the trustee owns the

lease and can treat it as an executory

contract subject to repudiation. Second,

the Board is concerned that advancing

the funds to allow a nonmember leasing

company to purchase property for

leasing, and then allowing that

nonmember to retain both lease and title

to the underlying property, is

tantamount to making a loan to a

nonmember. While banks regulated by

the OCC may lend money to anyone,

FCUs may only lend money to members.

12 U.S.C. 1757. The second NPRM

contains additional discussion of these

concerns. 64 FR 55866, 55867 (October

15, 1999). Also, with regard to the

comment about protection of its interest

by ‘‘possession,’’ the FCU may protect

its lease assignment by possession of the

original lease documents or by an

appropriate filing. U.C.C. § 9–102(1)(b)

(sale of chattel paper), § 9–304(1), § 9–

305. However, the FCU must still obtain

a full assignment.

Two commenters object to the

following statement in the preamble to

the proposed § 714.3: ‘‘It (the security

agreement) 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.’’

These commenters read the quoted

language as requiring the security

agreement to contain an exhaustive list

of every obligation under the lease and

every possible form of default.

The Board does not intend to mandate

that every leasing security agreement

include an exhaustive listing of

obligations and defaults on those

obligations. The Board does believe that

an FCU ‘‘should consider the

contingencies that may seriously affect

(its) security and see that the security

agreement specifies them as events of

default.’’ James J. White and Robert S.

Summers, Uniform Commercial Code,

§ 34–2 (4th ed. 1995). Section 714.3

provides that the FCU must have the

right to take possession and dispose of

the leased property in the 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.’’

Ultimately, the FCU must determine for

itself how much detail about these and

other default contingencies is included

in the security agreement.

Another commenter asked whether

NCUA intended to require a detailed

security agreement for each lease, or

whether the substance of a well-drafted

security agreement could be subsumed

into a lease program agreement. The

Board believes that obligations and

defaults may be described in the

security agreement itself or may be

incorporated by clear reference to some

other document such as the master

leasing agreement or contract. Also, a

single security agreement may cover

multiple leases, so long as the

agreement sufficiently describes which

leases are covered.

One commenter suggests that the rule

should reinstate the requirement for an

irrevocable power of attorney contained

in the first NPRM but dropped from the

second. The NCUA Board believes that

a power of attorney is unnecessary for

an FCU holding a well-defined and

perfected security interest in the leased

property. In the event of a default by a

leasing company or lessee, an FCU

should be able to take possession and

dispose of the collateral without the

power of attorney. Accordingly, the

final rule no longer contains any

requirement for a power of attorney. The

Board notes, however, that the final rule

does not prohibit an FCU from

employing a power of attorney, in

addition to a security agreement.

Section 714.4—What Are the Lease

Requirements?

Proposed § 714.4 stated 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. In a full

payout lease, the FCU must recoup its

entire investment in the leased property,

plus the cost of financing that

investment, from the lessee’s payments

and the estimated residual value of the

leased property.

Numerous comments were directed to

the guarantee requirement. Some

commenters want the requirement

eliminated, some want the 25%

threshold raised, and others want the

requirement maintained at 25% or

lowered.

The commenters who want to

eliminate the guarantee requirement cite

the authority of national banks and

federal thrifts to engage in certain

leasing transactions without any

guarantee. As discussed below,

however, the legal authority supporting

FCU leasing varies from that for national

banks and federal thrifts. Unlike banks

and thrifts, which have express

authority to lease, FCUs have no express

authority.

Prior to 1982, all federal depository

institutions relied on the same source of

legal authority for leasing: their express

authority to lend money and the

argument that leasing is incidental to

this express lending authority. A lease

under this incidental authority must be

the equivalent of a secured loan.

Dependence on the residual value to

recover the depository institution’s costs

involves risks that are unlike those of

secured lending and, hence, the residual

value must ‘‘contribute insubstantially’’

to the institution’s recovery of its costs.

M&M Leasing Corporation v. Seattle

Federal Register / Vol. 65, No. 105 / Wednesday, May 31, 2000 / Rules and Regulations 34583

First National Bank, 563 F.2d 1377,

1384 (9th Cir. 1977), cert. denied, 436

U.S. 956 (1978). For national banks, the

OCC quantified M&M Leasing’s

‘‘insubstantial’’ contribution at 25%,

and required any reliance above 25% be

guaranteed. 12 CFR 23.21(a)(2). The

NCUA adopted this same 25% limit on

the unguaranteed portion of the residual

value in IRPS 83–3.

In the 1980s, Congress provided

national banks and federal thrifts with

additional, express statutory authority

to conduct leasing activities in an

aggregate amount not to exceed ten

percent of assets. See the Garn—St.

Germain Depository Institutions Act of

1982, Pub. L. No. 97–320, § 330(3),

codified at 12 U.S.C. 1464(c)(2)(A); and

the Competitive Banking Equality Act of

1987 (CEBA), Pub. L. No. 100–86, § 108,

codified at 12 U.S.C. 24(Tenth). This

express leasing authority empowers

national banks and federal thrifts to

assume increased risks in areas unique

to leasing, including residual value risk.

For example, in the Senate Report

accompanying CEBA’s grant of express

authority to national banks, the Senate

Committee on Banking, Housing, and

Urban Affairs stated its expectation that

with the express authority to lease ‘‘the

Comptroller will relax or eliminate the

residual value limitation [on national

banks] in the Comptroller’s regulation in

a manner consistent with sound banking

practices.’’ S. Rep. No. 100–19, at 42

(1987). Accordingly, neither OCC nor

OTS require residual value guarantees

for leases aggregating less than ten

percent of assets and so covered by

express leasing authority. See 12 CFR

part 23, subpart B; 12 CFR 560.41(d).

However, both the OCC and OTS still

require residual value guarantees for

banks and thrifts for leases in excess of

ten percent of assets and thus subject to

the restrictions on residual value risk

enunciated in M&M Leasing. See 12

CFR part 23, subpart C; 12 CFR

560.41(c), (b)(2).

One commenter that supported

elimination of the guarantee

requirement asks, in the alternative, if

credit unions with a demonstrated

ability to handle risk could set the

unguaranteed portion of the residual at

some level higher than 25% of original

cost. Other commenters support the

guarantee at its current 25% level or feel

that the 25% level should be lowered.

The Board has carefully considered

whether it should set the unguaranteed

portion of the residual at some level

other than the 25% figure contained in

IRPS 83–3. As discussed below, the

Board is not inclined to vary from the

long-standing 25% limitation.

Any increase in the unguaranteed

residual value above 25% may cause the

unguaranteed residual to ‘‘contribute

substantially’’ to the recovery of an

FCU’s costs and thus render the FCU’s

leasing program illegal under M&M

Leasing. The line between ‘‘substantial’’

and ‘‘insubstantial’’ is imprecise and not

susceptible to exact quantification.

Nevertheless, the Board considers a

25% contribution to cost recovery as

insubstantial, and any figure larger than

25% as problematic. The OCC has used

the current 25% figure for decades.

Also, the Board believes that the

economic impact of the guarantee

requirement is not significant. Insurance

companies offer reasonably-priced

residual value insurance that satisfies

the current 25% requirement. In vehicle

leasing, for example, a policy with a

25% deductible can generally be

obtained for a small, one-time premium

of between one-half to one percent of

the estimated residual value. In

addition, the Board is aware of FCUs

that purchase residual insurance in

coverage amounts exceeding the

requirements of the rule and yet remain

competitive in their vehicle leasing

markets.

The Board also considered the

possibility of tightening the 25%

guarantee requirement. The Board notes

that, with the authority to put up to

25% of the original cost at risk, credit

unions may still suffer significant losses

if actual residual values fall short of

estimates. Nevertheless, in the past

FCUs have handled this risk well. The

Board is willing to allow FCUs to use

their business judgment in deciding

how to handle residual value risks up to

the 25% level.

One commenter suggests that instead

of tying the guarantee to 25% of the

original cost, it should be tied to ‘‘a

certain percentage of the blue book

value.’’ The Board believes that the

guarantee requirement is best tied to an

FCU’s actual investment in the property,

as the key to loss avoidance in leasing

is recovery of costs. Also, the leasing

regulation covers leasing of all personal

property, not just vehicles. No particular

publication such as the ‘‘blue book’’

provides property values on every form

of personal property. The leasing rule’s

guarantee requirement is stated in terms

flexible enough to cover all personal

property leasing.

Five commenters request that any

guarantee requirement extend only to

the amount of the estimated residual

needed to satisfy the full payout test.

These commenters believe that the

proposed rule, which separates the

residual value guarantee requirement

from the full payout test, is inconsistent

with the OCC leasing rule and IRPS 83–

3. The Board concurs with these

commenters. The full payout test

requires that FCUs plan to recover all

leasing costs from the combination of

lease payments and the estimated

residual value. The guarantee

requirement is intended to protect an

FCU against the possibility of excessive

residual losses. The Board believes that

an FCU should only be required to

guarantee the portion of the estimated

residual value that is above 25% of the

original investment that is needed to

meet the full payout requirement,

meaning the amount an FCU relies on

to recover its costs. The Board has

changed the final rule to connect the

guarantee requirement clearly with the

full payout test. This connection results

in a lesser guarantee requirement and a

corresponding reduction in the burden

on FCUs. An illustration of the effect of

the final rule follows.

Assume you, an FCU, pay $12,000 for

a car and lease it under a closed-end

leasing arrangement. Assume that your

internal cost of financing is $2,000 and

that lease payments over the life of the

lease will be $8,500. To meet the full

payout requirement, you must recover

$14,000 (your investment and the cost

of financing) from the lease payments

and your estimated residual value.

Thus, in addition to the $8,500 in lease

payments, you will be relying on $5,500

in residual value to meet the full payout

requirement. You only have to

guarantee the portion of the residual

value on which you rely to meet the full

payout requirement that exceeds 25% of

the cost of the car, in this case, $3,000.

Thus, the amount of the residual value

that must be guaranteed will be $2,500

($5,500–$3,000).

For leases with estimated residual

values in excess of 25% of original cost

and subject to the guarantee

requirement, two commenters were

uncertain whether an FCU may assume

the first dollars of residual risk or must

guarantee the first dollars. These

commenters request clarification.

Neither the proposed rule nor the

IRPS require that FCUs guarantee the

first dollars of residual risk. Conversely,

neither the rule nor the IRPS require

that FCUs assume the first dollar of

residual risk. FCUs are free to guarantee

or assume the first dollars of residual

risk as they deem appropriate. The

Board is aware that insurers offer

residual value policies with deductibles

that place the first dollars of risk on the

FCU. Such policies are an acceptable

form of guarantee.

The Board also notes that residual

value insurance policies offer different

payout formulae. For example, one form

34584 Federal Register / Vol. 65, No. 105 / Wednesday, May 31, 2000 / Rules and Regulations

of insurance pays the difference

between the estimated residual value

and the actual sales price of the

property at the time of disposition.

Another, more common form pays the

difference between the estimated

residual value and the average price

being obtained for the given type of

property at the time of disposition.

Either of these payout formulae, with

appropriate deductibles, is permissible

for FCUs. However, if the FCU elects to

purchase residual insurance that relies

on average sale prices rather than the

specific sale proceeds from the property

at lease end, the FCU should ensure the

terms of insurance are reasonable in

relation to the method the FCU uses to

dispose of the leased property. For

example, if the FCU expects to dispose

of leased vehicles at wholesale auction,

it should use residual insurance that

pays based on wholesale prices.

Likewise, if the FCU expects to get most

of its leased vehicles back in ‘‘average’’

condition, it should look for insurance

tied to that condition.

Seven commenters object to language

in the preamble to the second NPRM on

the financing of certain costs associated

with the lease. The preamble states that

the financing of mechanical breakdown

protection, credit life and disability

premiums, and license and registration

fees raised safety and soundness

concerns and these services should not

be financed. The preamble cites a

specific concern that an FCU will have

little or no value in the collateral to

secure the financing of the additional

costs. The commenters generally

recognized the problem with

undercollateralization but do not

believe a blanket prohibition on the

financing of particular items was the

best response. As one commenter put it,

‘‘the problem of undercollateralization

is best determined by how much is

financed relative to the collateral, not by

what expenses are financed.’’ Some

commenters note that the current

industry practice among banks and

credit unions is to finance some or all

of these costs in particular cases. Some

commenters suggest that FCUs should

adopt lease-to-value guidelines similar

to the loan-to-value guidelines used in

lending programs, such as a maximum

lease investment (or loan investment) of

110% of the vehicle’s MSRP.

The Board remains concerned that

FCUs not overextend themselves but

recognizes that a blanket prohibition on

the financing of certain enumerated

services is not the best approach to this

issue. Instead, the Board recommends

that FCUs take appropriate measures to

ensure that their leases are properly

collateralized and their leasing

programs remain the functional

equivalent of secured lending.

Section 714.5—What is Required if You

Rely on an Estimated Residual Value

Greater than 25% of the Original Cost

of the Leased Property?

Proposed § 714.5 provided that an

estimated residual value greater than

25% of the original cost of the leased

property may be used if a financially

capable party guarantees the amount

above 25% of the original cost of the

property. If the guarantor is an

insurance company, the guarantor must

have an A.M. Best rating of at least a B+

or the equivalent from another major

rating company. The FCU must have

financial documentation on hand

demonstrating that the guarantor has the

resources to meet the guarantee.

Two commenters object to the

establishment of a minimum rating for

insurance companies. One of these

commenters cites state regulation of

insurance companies as sufficient to

establish any particular company’s

soundness. A third commenter agreed

with the concept of a minimum rating

but thought it should be tougher than

B+, such as a minimum ‘‘A’’ or ‘‘AA’’

rating.

The NCUA Board believes that

establishing a minimum rating standard

ensures that an insurance company

guarantor will have the resources to

meet the guarantee. A Best’s rating of B+

is the lowest rating that is considered by

Best to be ‘‘secure,’’ while any rating

lower than a B+ is considered to be

‘‘vulnerable.’’ FCUs that satisfy the

guarantee requirement through residual

insurance are dependent on the

insurance company’s ability to pay

residual claims when the leases end,

often years into the future. The Board

believes that FCUs should not use

insurers who are identifiable as

financially vulnerable.

The requirement for a residual insurer

to maintain a B+ rating also makes it

easier for an FCU using an insurance

company to satisfy the financial

documentation requirement of § 714.5.

An FCU that maintains a recent report

indicating that their residual insurer is

rated B+ or better would meet the

minimum documentation requirements.

If the FCU desires to use the Internet, an

up-to-date rating can be obtained at any

time both cheaply and quickly.

One commenter, citing IRPS 83–3 and

current OCC rules, requests that § 714.5

be amended to specifically exclude an

affiliate of the FCU from acting as

residual value guarantor. The Board

notes that credit union service

organizations (CUSOs) have specified,

limited powers. 12 CFR part 712.

Although CUSOs may engage in

insurance brokerage or agency activities,

they have no authority to assume

insurable risks, such as residual value

risk, for FCUs or other entities. 12

U.S.C. 1757(7); 12 CFR 712.5, 712.6; 51

FR 10353, 10357 (March 26, 1986). The

Board does not believe a modification to

§ 714.5 is necessary.

Section 714.6—Are You Required to

Retain Salvage Powers Over the Leased

Property?

Proposed § 714.6 states that an FCU

must retain salvage powers over the

leased property. NCUA received no

comments on this section, and it

remains unchanged.

Section 714.7—What are the Insurance

Requirements Applicable to Leasing?

Proposed § 714.7 provides that the

FCU must maintain a contingent

liability insurance policy with an

endorsement for leasing or be named as

the co-insured. The insurance company

must have a rating of at least B+. The

lessee must carry the normal liability

and collateral protection insurance on

the leased property, and the FCU must

be named as an additional insured on

the liability insurance policy and as the

loss payee on the collateral protection

insurance policy.

Two commenters suggest that the

phrase ‘‘collateral protection insurance’’

be replaced with ‘‘physical damage’’ or

‘‘property insurance’’ to more accurately

reflect the type of insurance a lessee

would purchase. The Board concurs

with these commenters. The Board

replaced the phrase ‘‘collateral

protection insurance’’ with ‘‘property

insurance,’’ which would include

protection from physical damage, loss,

or theft.

Section 714.8—What Rate of Interest

May be Charged Under a Lease?

Proposed § 714.8 stated that the

interest rate provisions of the NCUA

lending rule are not applicable to lease

transactions. Proposed § 714.8 also

exempted lease transactions from the

NCUA lending rules on early payment.

NCUA received no comments on this

section, and it remains unchanged in

the final version.

Section 714.9—When Engaged in

Indirect Leasing, Must You Comply With

the Purchase of Eligible Obligation

Rules Set Forth in § 701.23 of This

Chapter?

Proposed § 714.9 provided that

indirect leasing arrangements are not

subject to the purchase of eligible

obligation rules set forth in § 701.23 if

the lease complies with the FCU’s

Federal Register / Vol. 65, No. 105 / Wednesday, May 31, 2000 / Rules and Regulations 34585

leasing polices and the FCU receives a

full assignment of the lease no more

than five business days after it is signed

by the member and the leasing

company.

Two commenters object to the fivebusiness-day requirement. One

commenter believes the time required to

transfer paper in indirect lending is

similar to that required in indirect

leasing and states that many retail

installment contracts are not received

within five days. This commenter

recommends changing the five-businessday requirement to thirty business days.

The other commenter states that the

five-day language does not mirror the

‘‘very soon’’ language employed in the

eligible obligations rule and that the

difference may cause confusion. The

eligible obligations rule has a provision

specifying which indirect lending and

indirect leasing obligations will be

classified as loans and not as eligible

obligations for purposes of the aggregate

5% limitation imposed on eligible

obligations. 12 CFR 701.23(b)(3)(iv).

One of the specified criteria for

excluding indirect leasing arrangements

from this 5% limitation is that the

‘‘lease contract [be] assigned to the

federal credit union very soon after it is

signed.’’ The latter commenter prefers

that the ‘‘very soon’’ language of the

eligible obligations rule be used in

§ 714.9, the corresponding provision of

the leasing rule. For consistency

between the leasing rule and the eligible

obligations rule and to maintain

flexibility, the Board has replaced the

language of the proposed § 714.9 with a

direct reference to § 701.23(b)(3)(iv)

including a restatement of its

requirements.

Section 714.10—What Other Laws Must

You Comply With When Engaged in

Leasing?

Proposed § 714.10 set forth the

additional laws with which an FCU

must comply when engaged in leasing.

One commenter notes that national bank

and federal thrift leasing activities are

subject to lending limits and

recommends that our regulatory limits

on loans to one borrower and loans to

officials limitations be incorporated into

the final leasing regulation. The Board

notes that the proposed § 714.10 already

required FCUs engaged in leasing to

comply with the greater part of the

NCUA lending rule, § 701.21, including

the lending limits found at

§§ 701.21(c)(5) and (d). Accordingly, no

change to § 714.10 was made in the final

rule.

E. Other Comments

Two commenters ask that we address

the risks of balloon lending in the

leasing regulation. Assured-value

balloon loans, or ‘‘lease-look-alike’’

loans, allow the borrower to return the

financed property at the end of the loan

term in lieu of making the remaining

balloon payment. The commenters

argue that these loans carry residual

risks for FCUs very similar to those in

traditional closed-end leasing and

should be regulated similarly.

As was discussed in the preamble to

the second NPRM, 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.

F. Regulatory Procedures

Paperwork Reduction Act

The NCUA Board determined that the

requirement in § 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. Both NPRMs contained

a description of the requirement and an

estimate of the associated workload. No

comments were received on the

estimated workload. OMB assigned

control number 3133–0151 to this

collection. 12 CFR part 795.

Regulatory Flexibility Act

The NCUA Board certifies that the

proposed regulation will not have a

significant economic impact on a

substantial number of small credit

unions. Small credit unions are defined

by NCUA, pursuant to its authority to

define ‘‘small organizations,’’ as those

credit unions with assets of $1 million

or less. 5 U.S.C. 601(4), (6); NCUA IRPS

81–4, 46 FR 29248 (1981); NCUA IRPS

87–2, 12 CFR 791.8(a). As of December

31, 1999, there were 1,069 FCUs that

met the small organization standard. Of

these 1,069 FCUs, only seven report any

leasing activity, with a total of only 66

leases amongst these credit unions.

Accordingly, a regulatory flexibility

analysis is not required.

Executive Order 13132

Executive Order 13132, Federalism,

dated August 4, 1999, prescribes certain

requirements for executive branch

policies ‘‘that have federalism

implications.’’ Policies that have

federalism implications include any

regulations that have substantial direct

effects on the States, on the relationship

between the national government and

the States, or on the distribution of

power and responsibilities among the

various levels of government.

Independent regulatory agencies, such

as NCUA, are not required to follow EO

13132 but are encouraged to do so, and

NCUA voluntarily complies with EO

13132. The final leasing rule, however,

will only apply to federally-chartered

credit unions. The rule has no

substantial direct effects on States or on

the relationship or distribution of power

and responsibility between the national

government and the States. NCUA has

determined that this rule does not

constitute a policy that has federalism

implications for purposes of the

executive order.

Assessment of Federal Regulations and

Policies on Families

NCUA has determined that this rule

will not affect family well-being within

the meaning of Section 654 of the

Treasury and General Government

Appropriations Act, 1999, Pub. L. No.

105–277, 112 Stat. 2681 (1998).

Small Business Regulatory Enforcement

Fairness Act

The Small Business Regulatory

Enforcement Fairness Act of 1996 (Pub.

L. No. 104–21) provides generally for

congressional review of agency rules. A

reporting requirement is triggered in

instances where NCUA issues a final

rule as defined by section 551 of the

Administrative Procedures Act. 5 U.S.C.

551. The Office of Management and

Budget has reviewed this rule and has

determined that for purposes of the

Small Business Regulatory Enforcement

Fairness Act of 1996 it is not a major

rule.

List of Subjects in 12 CFR Part 714

Credit unions, Leasing.

By the National Credit Union

Administration Board on May 24, 2000.

Becky Baker,

Secretary to the Board.

For the reasons set forth above, NCUA

adds 12 CFR 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?

34586 Federal Register / Vol. 65, No. 105 / Wednesday, May 31, 2000 / Rules and Regulations

714.4 What are the lease requirements?

714.5 What is required if you rely on an

estimated residual value greater than

25% of the original cost of the leased

property?

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 § 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.

§ 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.

§ 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, a third party

leases property to your member and you

then purchase that lease from the third

party for the purpose of leasing the

property to your member. You do not

have to purchase the leased property if

you comply with the requirements of

§ 714.3.

(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. However, your

member is always responsible for any

excess wear and tear and excess mileage

charges as established under the lease.

§ 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

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.

§ 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) The amount of the estimated

residual value you rely upon to satisfy

the full payout lease requirement 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.

§ 714.5 What is required if you rely on an

estimated residual value greater than 25%

of the original cost of the leased property?

If the amount of the estimated

residual value you rely upon to satisfy

the full payout lease requirement of

§ 714.4(b) exceeds 25% of the original

cost of the leased property, a financially

capable party must guarantee the excess.

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.

§ 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.

§ 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 property 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 property insurance policy.

§ 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

§ 701.21(c)(6) of this chapter. You are

also not subject to the interest rate

provisions in § 701.21(c)(7).

§ 714.9 Are indirect leasing arrangements

subject to the purchase of eligible

obligation limit set forth in § 701.23 of this

chapter?

Your indirect leasing arrangements

are not subject to the eligible obligation

limit if they satisfy the provisions of

§ 701.23(b)(3)(iv) that require that you

make the final underwriting decision

and that the lease contract is assigned to

you very soon after it is signed by the

member and the dealer or leasing

company.

§ 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

Federal Register / Vol. 65, No. 105 / Wednesday, May 31, 2000 / Rules and Regulations 34587

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 § 701.21 of this chapter,

except as provided in § 714.8 and

§ 714.9 of this part. The lending rules in

§ 701.21 address the preemption of

other state and federal laws that impact

on credit transactions.

[FR Doc. 00–13509 Filed 5–30–00; 8:45 am]

BILLING CODE 7535–01–U

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Part 173

[Docket No. 00F–0786]

Secondary Direct Food Additives

Permitted in Food for Human

Consumption

AGENCY: Food and Drug Administration,

HHS.

ACTION: Final rule.

SUMMARY: The Food and Drug

Administration (FDA) is amending the

food additive regulations to provide for

the safe use of chlorine dioxide

produced by treating an aqueous

solution of sodium chlorite with

hydrogen peroxide in the presence of

sulfuric acid. This action is in response

to a petition filed by Eka Chemicals, Inc.

DATES: This rule is effective May 31,

2000. Submit written objections and

requests for a hearing by June 30, 2000.

ADDRESSES: Submit written objections to

the Dockets Management Branch (HFA–

305), Food and Drug Administration,

5630 Fishers Lane, rm. 1061, Rockville,

MD 20852.

FOR FURTHER INFORMATION CONTACT:

Robert L. Martin, Center for Food Safety

and Applied Nutrition (HFS–215), Food

and Drug Administration, 200 C St. SW.,

Washington, DC 20204–0001, 202–418–

3074.

SUPPLEMENTARY INFORMATION: In a notice

published in the Federal Register of

March 2, 2000 (65 FR 11319), FDA

announced that a food additive petition

(FAP 0A4716) had been filed by Eka

Chemicals, Inc., c/o Keller and

Heckman LLP, 1001 G St. NW., suite

500 West, Washington, DC 20001. The

petition proposed to amend the food

additive regulations in § 173.300

Chlorine dioxide (21 CFR 173.300) to

provide for the safe use of chlorine

dioxide produced by treating an

aqueous solution of sodium chlorite

with hydrogen peroxide in the presence

of sulfuric acid.

FDA has evaluated data in the

petition and other relevant material.

Based on this information, the agency

concludes that the proposed use of the

additive is safe, that the additive will

achieve its intended technical effect,

and, therefore, that the regulation in

§ 173.300 should be amended as set

forth below.

In accordance with § 171.1(h) (21 CFR

171.1(h)), the petition and the

documents that FDA considered and

relied upon in reaching its decision to

approve the petition are available for

inspection at the Center for Food Safety

and Applied Nutrition by appointment

with the information contact person

listed above. As provided in § 171.1(h),

the agency will delete from the

documents any materials that are not

available for public disclosure before

making the documents available for

inspection.

In the notice of filing, FDA gave

interested parties an opportunity to

submit comments on the petitioner’s

environmental assessment. FDA

received no comments in response to

that notice.

The agency has carefully considered

the potential environmental effects of

this action. FDA has concluded that the

action will not have a significant impact

on the human environment, and that an

environmental impact statement is not

required. The agency’s finding of no

significant impact and the evidence

supporting that finding, contained in an

environmental assessment, may be seen

in the Dockets Management Branch

(address above) between 9 a.m. and 4

p.m., Monday through Friday.

This final rule contains no collection

of information. Therefore, clearance by

the Office of Management and Budget

under the Paperwork Reduction Act of

1995 is not required.

Any person who will be adversely

affected by this regulation may at any

time file with the Dockets Management

Branch (address above) written

objections by June 30, 2000. Each

objection shall be separately numbered,

and each numbered objection shall

specify with particularity the provisions

of the regulation to which objection is

made and the grounds for the objection.

Each numbered objection on which a

hearing is requested shall specifically so

state. Failure to request a hearing for

any particular objection shall constitute

a waiver of the right to a hearing on that

objection. Each numbered objection for

which a hearing is requested shall

include a detailed description and

analysis of the specific factual

information intended to be presented in

support of the objection in the event

that a hearing is held. Failure to include

such a description and analysis for any

particular objection shall constitute a

waiver of the right to a hearing on the

objection. Three copies of all documents

are to be submitted and are to be

identified with the docket number

found in brackets in the heading of this

document. Any objections received in

response to the regulation may be seen

in the Dockets Management Branch

between 9 a.m. and 4 p.m., Monday

through Friday.

List of Subjects in 21 CFR Part 173

Food additives.

Therefore, under the Federal Food,

Drug, and Cosmetic Act and under

authority delegated to the Commissioner

of Food and Drugs and redelegated to

the Director, Center for Food Safety and

Applied Nutrition, 21 CFR part 173 is

amended as follows:

PART 173—SECONDARY DIRECT

FOOD ADDITIVES PERMITTED IN

FOOD FOR HUMAN CONSUMPTION

1. The authority citation for 21 CFR

part 173 continues to read as follows:

Authority: 21 U.S.C. 321, 342, 348.

2. Section 173.300 is amended by

revising paragraph (a) to read as follows:

§ 173.300 Chlorine dioxide.

* * * * *

(a) The additive is generated by one

of the following methods: Treating an

aqueous solution of sodium chlorite

with either chlorine gas or a mixture of

sodium hypochlorite and hydrochloric

acid, or treating an aqueous solution of

sodium chlorate with hydrogen

peroxide in the presence of sulfuric

acid. In either case, the generator

effluent contains at least 90 percent (by

weight) of chlorine dioxide with respect

to all chlorine species as determined by

Method 4500–ClO2 E in the ‘‘Standard

Methods for the Examination of Water

and Wastewater,’’ 18th ed., 1992, or an

equivalent method. Method 4500–ClO2

E is incorporated by reference in

accordance with 5 U.S.C. 552(a) and 1

CFR part 51. Copies are available from

the Center for Food Safety and Applied

Nutrition (HFS–200), Food and Drug

Administration, 200 C St. SW.,

Washington, DC 20204–0001, and the

American Public Health Association,

1015 Fifteenth St. NW., Washington, DC

20005, or may be examined at the Office

of the Federal Register, 800 North

Capitol St. NW., suite 700, Washington,

DC.

* * * * *