Letters to Regulators
NCUA Proposed Amendments Concerning Suretyship and Guaranty Agreements and Maximum Borrowing Authority
December 1, 2003
Becky Baker, Secretary of the Board
Re: 12 CFR Parts 701 and 741: Suretyship and Guaranty; Maximum Borrowing Authority
Dear Ms. Baker:
The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to offer the following comments on the National Credit Union Administration's (NCUA) proposed amendments concerning suretyship and guaranty agreements and maximum borrowing authority.
Suretyship and Guaranty Agreements
The NCUA Board ("Board") is proposing to add a provision to its regulations that would allow a federal credit union to act as surety or guarantor on behalf of its members. The Board says that acting as a guarantor or surety for a member is an incidental power of a federal credit union because (a) it is convenient or useful for a federal credit union to extend credit to its members, (b) it is a logical extension of a federal credit union's authority to make loans to its members and to provide letters of credit on behalf of its members, and (c) it involves risks that are similar in nature to the risks involved in a federal credit union's lending activity.
To ensure the safety and soundness of surety and guaranty agreements, the Board is proposing three requirements that are similar to OCC and OTS requirements for guaranty and suretyship. First, the obligation under the agreement must be limited to a fixed amount and limited in duration. Secondly, the suretyship or guaranty agreement must meet all regulatory requirements that are applicable to loans. Thirdly, the federal credit union must have collateral equal to 100 or 110 percent of the obligation.
Since suretyship and guaranty agreements are most often used for business purposes and therefore will involve risks similar in nature to the risks involved in commercial lending activity, the Board's proposal to allow credit unions to enter into suretyship and guaranty agreements should be considered a significant expansion of the commercial lending powers of credit unions. ICBA opposes the expansion of commercial lending powers by credit unions as long as credit unions are tax-exempt. Credit unions should maintain their focus on consumer lending, not business lending. Business lending is inherently riskier than consumer lending and credit unions do not have the management expertise and experience to properly and safely underwrite commercial credits.
A recent report by the General Accounting Office underscores the fact that credit unions should concentrate more on their statutory mission to serve individuals of small means. The report indicates that based on 2001 HMDA loan application records, credit unions made a lower proportion of mortgage loans to households with low- and moderate- incomes than peer group community banks. GAO pointed out that these results are similar to what other studies by CUNA and the Woodstock Institute indicate-that credit unions serve a higher-income population than banks.
Furthermore, the GAO study showed that, because of the virtual elimination of the common bond field of membership requirement, the credit union industry is more concentrated now than it was ten years ago and that this concentration is creating systemic risks to the credit union share insurance fund much like the concentration in the banking industry has created risks to the bank insurance fund.
In short, the GAO report indicates that credit unions should be reducing their commercial lending activity, not expanding it, in order to concentrate on their central mission which is to serve individuals of small means. Since the credit union industry is more concentrated than ever before, the Board should be considering ways to decrease risks to the credit union share insurance fund. Expanding the commercial lending powers of credit unions will only increase risks to the fund even if safeguards are in place to try to control such risks. For these reasons, ICBA opposes the proposal by the Board to allow federal credit unions to enter into suretyship and guaranty agreements with their members.
Maximum Borrowing Authority
The Board also is proposing to create a process to allow federally insured, state-chartered credit unions (FISCUs) to apply for a waiver from the maximum borrowing limitation of 50 percent of paid-in and unimpaired capital and surplus. FISCUs applying for the waiver would have to show that (1) state law permits the higher limit than that specified in the Federal Credit Union Act, and (2) that there are safeguards in place to mitigate risks.
ICBA opposes any attempt by the credit union industry to exceed its statutory, maximum borrowing authority, even though such an attempt would require the approval of the Board. The Federal Credit Union Act (12. U.S.C. 1757(9)) limits the maximum borrowing authority of a federal credit union to "50% of its paid-in and unimpaired capital and surplus." This is more than enough borrowing authority for a financial institution. Allowing the Board the discretion to waive the requirement will only increase the risks to the credit union share insurance fund at a time when the industry is more concentrated than ever before and the Board should be looking at ways to reduce risks to the fund.
ICBA opposes allowing tax-exempt credit unions to enter into suretyship and guaranty agreements since this would involve a significant expansion of the commercial lending powers of credit unions. The GAO report indicates that credit unions should be concentrating on their statutory mission of lending to individuals of small means and not on commercial lending. ICBA is also concerned that allowing the Board to waive the statutory, maximum borrowing authority will only increase the risks to the credit union share insurance fund at a time when, according to the GAO report, the industry is becoming too concentrated. If you have any questions or need any additional information, please contact Chris Cole, ICBA's regulatory counsel at 202-659-8111 or Chris.Cole@icba.org.
1 About ICBA: ICBA is the nation's leading voice for community banks and the only national trade association dedicated exclusively to protecting the interests of the community banking industry. We aggregate the power of our members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace. ICBA has nearly 5,000 members with 17,000 locations nationwide. Our members hold more than $526 billion in insured deposits, $643 billion in assets and more than $405 billion in loans to consumers, small businesses and farms. For more information, visit www.icba.org.