[Federal Register Volume 63, Number 181 (Friday, September 18, 1998)]
[Proposed Rules]
[Pages 49874-49877]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25022]
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Proposed Rules
Federal Register
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This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 63, No. 181 / Friday, September 18, 1998 /
Proposed Rules
[[Page 49874]]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 545, 560
[No. 98-92]
RIN 1550-AB21
Letters of Credit, Suretyship and Guaranty
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Office of Thrift Supervision (OTS) is proposing to amend
its regulations to clarify that a Federal savings association may act
as guarantor and may issue letters of credit. Additionally, the
proposed rule would impose restrictions, based on safety and soundness,
on suretyship and guaranty agreements issued by Federal and state-
chartered savings associations. The OTS is also requesting comment on
whether it should adopt a regulation addressing the escrow authority of
Federal savings associations.
DATES: Comments must be received on or before November 17, 1998.
ADDRESSES: Send comments to Manager, Dissemination Branch, Records
Management and Information Policy, Office of Thrift Supervision, 1700 G
Street, N.W., Washington, DC 20552, Attention Docket No. 98-92. These
submissions may be hand-delivered to 1700 G Street, N.W., from 9:00
a.m. to 5:00 p.m. on business days; they may be sent by facsimile
transmission to FAX Number (202) 906-7755; or they may be sent by e-
mail: public.info@ots.treas.gov. Those commenting by e-mail should
include their name and telephone number. Comments will be available for
inspection at 1700 G Street, N.W., from 9:00 a.m. until 4:00 p.m. on
business days.
FOR FURTHER INFORMATION CONTACT: William J. Magrini, Senior Project
Manager, (202) 906-5744, Supervision Policy; Raynette Gutrick,
Attorney, (202) 906-6265, Regulations and Legislation Division or Karen
Osterloh, Assistant Chief Counsel, (202) 906-6639, Regulations and
Legislation Division, Chief Counsel's Office, Office of Thrift
Supervision, 1700 G Street N.W., Washington, D.C. 20552.
SUPPLEMENTARY INFORMATION: The OTS is proposing this rule to clarify a
Federal savings association's authority to act as guarantor and to
issue letters of credit. Additionally, the proposed rule would impose
restrictions, based on safety and soundness, on suretyships and
guaranty agreements issued by Federal and state-chartered savings
associations. The OTS also is seeking comment on whether it should
adopt a regulation to address the escrow authority of Federal savings
associations.
I. Suretyship and Guaranty
Section 5(b)(2) of the Home Owners' Loan Act (the ``HOLA'')
provides ``[t]o such extent as the Director may authorize in writing, a
Federal savings association * * * may be surety as defined by the
Director * * *'' 1 The OTS's current regulations at 12 CFR
545.103 authorize Federal savings associations to act as surety subject
to several requirements.
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\1\ 12 U.S.C.A. 1464(b)(2) (West 1998).
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The OTS is proposing to make several modifications to the surety
regulation. Initially, the OTS would move this regulation from part
545, which governs the general operations of Federal savings
associations, to Part 560, subpart A, which addresses the lending and
investment powers of Federal thrifts. See proposed Sec. 560.45.
Neither HOLA nor the current OTS regulations specifically address a
Federal savings association's authority to issue a guaranty. Under a
suretyship agreement, the surety is bound with its principal to pay or
perform an obligation to a third party.2 Under a guaranty
agreement, on the other hand, the guarantor agrees to satisfy the
obligation of the principal to another only if the principal fails to
pay or perform.3 While both a surety and guarantor agree to
be bound for the principal, there are other differences between the two
types of agreements. A surety is usually bound with the principal by
the same instrument, which is executed simultaneously.4 On
the other hand, a guarantor usually enters into a separate agreement
with the third party in which the principal does not join.5
The guaranty agreement is usually entered into before or after that of
the principal, and is often founded on a separate consideration from
that supporting the contract of the principal.6
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\2\ Black's Law Dictionary 1441-42 (6th ed. 1990).
\3\ Id. at 705.
\4\ Id. at 1441-42.
\5\ Id.
\6\ Id. Suretyship and guaranty agreements are similar to
letters of credit to the extent that they are used for a common
purpose--ensuring against the obligor's nonperformance. Under a
letter of credit, however, the savings association's obligation to
honor depends on the presentation of specified documents and not
upon non-documentary conditions or resolutions of questions of law
or fact at issue between the account party and the beneficiary. See
12 CFR 560.120(a) (1998).
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The OTS and its predecessor, the Federal Home Loan Bank Board
(``FHLBB''), have long recognized that the authority of a Federal
savings association to act as guarantor is subsumed within section
5(b)(2) of the HOLA.7 To clarify this point, proposed
Sec. 560.45 would specifically state that a Federal savings association
is also authorized to act as guarantor.
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\7\ See e.g., 48 FR 23032, 23043 (May 23, 1983) (stating that
section 5(b)(2) of the HOLA empowers the FHLBB to authorize by
regulation the issuance of suretyship devices by Federal savings
associations for the purpose of guaranteeing the obligations of
others); FHLBB Op. Assoc. Gen Counsel (July 5, 1983) (permitting the
association to act as surety or guarantor under section 5(b)(2) of
the HOLA). See also 12 CFR 545.16(a)(3) (1998) (``surety'' means
surety under real and/or personal suretyship, and includes
guarantor).
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Currently, Sec. 545.103 contains various provisions designed to
ensure the safety and soundness of surety agreements by Federal savings
associations. These safety and soundness concerns are the same for
suretyship and guaranty agreements by state-chartered savings
associations. Accordingly, the OTS proposes to incorporate these
requirements in part 560, subpart B, which contains the safety and
soundness-based lending and investment restrictions applicable to all
savings associations. Proposed Sec. 560.115(a) would state that to the
extent that a savings association has the legal authority to do so, it
may enter into an agreement to act as surety or guarantor, if the
agreement meets stated requirements. Proposed section 560.115(b) is a
new provision, which explains the terms ``suretyship and guaranty
agreement.''
[[Page 49875]]
Proposed Sec. 560.115(c) would contain four restrictions on surety
and guaranty agreements. The first restriction is new. It would require
that the association's obligation under the suretyship or guaranty
agreement be limited to a fixed amount and limited in duration. Without
a restriction limiting the amount and duration of the agreement, a
Federal savings association may take on more risk than it bargained for
in the agreement. The remaining three restrictions are based on the
current rule on suretyship agreements at Sec. 545.103. Under the
proposed rule, a savings association may enter into an agreement only
if its performance under the agreement (e.g., the payment of the
obligation on behalf of the principal) would create a loan or other
investment that is authorized for the association under applicable law.
Additionally, the savings association's obligation under the agreement
would be treated as a contractual commitment to advance funds to the
principal under the loans-to-one-borrower limits and loans to insider
restrictions. Finally, the savings association must take and maintain a
perfected security interest in collateral sufficient to cover its
obligation under the agreement.
The proposed rule would modify the collateral requirements
currently imposed under existing Sec. 545.103. Under the current rule,
a Federal savings association must take and maintain a security
interest in real estate or marketable securities equal to 110 percent
of its obligation under the agreement.8 If the collateral is
real estate, the Federal savings association must establish the value
of the property by a signed appraisal consistent with 12 CFR part 564.
If the collateral is marketable securities, the Federal savings
association must be authorized to invest in the securities and must
ensure that the value of the securities is equal to 110 percent of the
obligation at all times. These requirements are retained for all
savings associations at proposed Sec. 560.45(d)(1).
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\8\ 12 CFR 545.103(b) (1998).
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The proposed rule, however, would permit a savings association to
hold collateral of a lesser amount under certain circumstances. This
new provision is modeled on the Office of Comptroller of the Currency's
(OCC) rule on suretyship and guaranty agreements.9 Under
proposed Sec. 560.45(d)(2), a savings association would be permitted to
maintain a security interest equal to 100 percent of the obligation, if
the collateral is cash, obligations of the United States or its
agencies, obligations fully guaranteed by the United States or its
agencies as to principal and interest, or notes, drafts, or bills of
exchange or bankers' acceptances that are eligible for rediscount or
purchase by a Federal Reserve Bank.10
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\9\ 12 CFR 7.1017 (1998).
\10\ Certain provisions of existing Sec. 545.103 have not been
retained. For example, current Sec. 545.103(c) addresses what
happens if a Federal savings association is required to perform
under the suretyship agreement. This section states that a Federal
savings association would be required to treat the amount advanced
as an extension of credit, subject to investment limits and other
restrictions applicable to such an extension of credit. The OTS has
not retained this paragraph because it duplicates existing
Sec. 560.31(a).
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The OTS requests comment on whether there are other suretyship,
guaranty, or similar arrangements that the OTS should permit either by
rule or through an approval process. For example, the OCC has
determined that an arrangement whereby a national bank holds out to the
public that it will honor checks drawn on it up to a certain amount, is
essentially an agreement by the bank to extend credit to the depositor
and is a permissible activity.11 The OTS requests comment on
whether the final rule should clarify how it will treat such
arrangements.
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\11\ See 12 CFR 7.7015 (1996).
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II. Letters of Credit and Other Independent Undertakings
Under existing OTS and FHLBB precedent, Federal savings
associations are authorized to issue letters of credit. Although the
HOLA does not explicitly confer the authority to issue letters of
credit, both agencies determined that the express authority to invest
in or make loans necessarily includes the authority to make loan
commitments and to issue letters of credit.12
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\12\ 61 FR 50951, 50958 (September 30, 1996). This authority was
first recognized in 1983 by the FHLBB, which determined that this
power was implicit under new lending authority in the Garn-
St.Germain Depository Institutions Act of 1982 (DIA), Pub. L. No.
97-320, 96 Stat. 1469 (1982). This lending authority included the
authority to make secured or unsecured loans for commercial,
corporate, business, or agricultural purposes (currently 12 U.S.C.
1464(c)(2)(A)), and the authority to make loans on the security of
liens upon nonresidential real property (currently 12 U.S.C.
1464(c)(2)(B)). The FHLBB reasoned that the DIA was intended to give
Federal savings associations competitive parity with national banks
with respect to credit services provided to business customers.
Because the authority to issue commercial and standby letters of
credit was a well-established incidental power of national banks,
the FHLBB determined that this authority was also conferred on
Federal savings associations. 48 FR 23032, 23043 (May 23, 1983). The
FHLBB also noted that 12 U.S.C. 1464(b)(2), which authorizes Federal
associations to act as surety, supported this determination.
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Until recently, the OTS regulations specifically authorized Federal
savings associations to issue commercial and standby letters of
credit.13 In the recent rule on lending and investment, the
OTS proposed to include an express authorization for letters of credit
in the lending and investment chart at 12 CFR 560.30. However, the OTS
deleted this authorizing provision in the final rule ``because issuing
a letter of credit is not in and of itself a loan or investment.'' The
OTS, nonetheless, included prudent standards for the issuance of
letters of credit and other approved independent undertakings by all
savings associations at 12 CFR 560.120. These standards, however, apply
only to the extent that a savings association has legal power to issue
and commit to issue letters of credit and other approved independent
undertakings.
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\13\ 12 CFR 545.48 (1996), removed 61 FR 50951 (September 30,
1996).
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The deletion of Sec. 545.48 has inadvertently created confusion as
to whether Federal savings associations continue to hold authority to
issue letters of credit and other approved independent undertakings. To
clarify this point, the OTS is proposing to add a new section to part
560, subpart A, which addresses the lending and investment powers of
Federal saving associations. While a letter of credit technically is
neither a loan nor an investment, once funds are advanced under a
letter of credit, the advance is treated as an extension of credit and
is subject to investment limits and other restrictions on lending. See
Sec. 560.31(a). Accordingly, the OTS believes it is appropriate to
place this new provision in part 560.
Proposed Sec. 560.50 would state that a Federal savings association
may issue letters of credit and such other independent undertakings as
are approved by the OTS, subject to the restrictions of Sec. 560.120.
Like existing Sec. 560.120, the new section uses the phrase ``letters
of credit and other independent undertakings.'' The OTS has used this
phrase to encompass letters of credit as well as all commitments where
the Federal savings association's obligation to honor the commitment is
dependent solely on the proper presentation of specified documents
regardless of extrinsic factors (except fraud, forgery, or an
overriding public policy issue). The term covers a broad array of
transactions including commercial letters of credit, standby letter of
credit, and other undertakings that are functionally identical or
equivalent to letters of credit.
In the thrift context, the broad scope of the term ``independent
undertakings'' and its recent evolution require close
[[Page 49876]]
supervision and review when such undertakings fall outside the more
traditional activities generally known as letters of credit.
Accordingly, OTS believes that allowing Federal savings associations to
issue independent undertakings of a type specifically approved by OTS
strikes the appropriate balance between allowing a Federal savings
association the flexibility to engage in such transactions and, at the
same time, ensuring that thrifts have properly evaluated the risks
posed by a particular transaction consistent with prudent banking
practice. OTS anticipates that its approval may take the form of legal
opinions, general guidance, or case-by-case approvals, depending upon
how the undertakings are presented to the agency.14
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\14\ See 61 FR 50951, 50958 (September 30, 1996).
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III. Escrow Accounts
Although the HOLA does not expressly address escrow accounts, the
OTS and the FHLBB have authorized Federal savings associations to
provide escrow services in several instances. For example, the FHLBB,
in 1959 issued a policy statement permitting Federal savings
associations to provide escrow services in connection with real estate
loans. This policy statement provided:
A Federal savings association may not act generally as an agent
for the public in handling escrows. It may, however, handle escrows
relating to real estate loans it makes and, to the extent reasonably
incidental to accomplishing its express purposes, may handle escrows
for others involving the type of real estate transactions common to
the savings association business.15
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\15\ 12 CFR 556.2 (1996).
This policy statement remained substantively unchanged until 1996 when
OTS removed it because the ``authority to establish escrow accounts is
subsumed within the authority of Federal savings associations to make
loans and does not need to be specifically identified in the CFR.''
16
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\16\ 61 FR 50951, 50961 (September 30, 1996).
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Some questions have been raised concerning the scope of Federal
savings associations' authority to handle escrow accounts that are not
related to loans. For example, even while the policy statement was
effective, the OTS indicated that fiduciary activities involving non-
discretionary activities such as escrow or safekeeping services, or
acting as a custodian or paying agent are implicit in the express
powers of Federal savings associations, including deposit
powers.17
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\17\ OTS Regulatory Handbook: Trust Activities, Sec. 140 (1992)
and Op. Chief Counsel (October 17, 1995) (The authority to engage in
these basic banking activities is derived from the incidental powers
doctrine, not from section 5(n) of the HOLA. Thus, a Federal savings
association is not required to obtain trust powers ``to perform
limited duties and responsibilities such as escrow, safekeeping, or
custodian services, even though the performance of such duties
requires a degree of trust and care.'')
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More recently, the OTS issued an opinion stating that a Federal
savings association may hold an account that would escrow funds
representing down-payments on vacations for its customer, a vacation
organizer.18 The OTS concluded that the activity fell within
the incidental powers of Federal savings associations.19 The
OTS reasoned that the proposed escrow service would allow the savings
association to provide its customer with more convenient access to
needed financial services and is, thus, consistent with Congress'
intent that Federal savings associations meet the needs of their
business customers. Moreover, the OTS found that the proposed escrow
service is similar to deposit taking and other escrow, safekeeping and
document custodian services that Federal savings associations are
already authorized to conduct. Further, the OTS noted that the proposed
escrow activities would support funds intermediation by facilitating
the conduct of financial transactions and would permit thrifts to
compete more equally with commercial banks, which are permitted to
provide such services.20
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\18\ OTS Op. Chief Counsel (August 19, 1998).
\19\ See OTS Op. Acting Chief Counsel (March 25, 1994) at 7-8
and (October 17, 1994) at 4-5, which set forth the factors that OTS
considers in its incidental powers analysis.
\20\ In a OCC Letter No. 86-11 (1986), the OCC did not object to
an impound arrangement where the bank without trust powers would
receive as deposits the funds submitted by subscribers to a limited
partnership.
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While the OTS has not proposed any new regulatory text on escrow
accounts in today's rulemaking, it requests comment whether it should
issue a rule clarifying the scope of escrow authority of Federal
savings associations. Commenters are also specifically asked to address
whether the OTS should place any restrictions on the exercise of the
escrow authority.
IV. Executive Order 12866
The Director of the OTS has determined that this proposed
regulation does not constitute a ``significant regulatory action'' for
the purpose of Executive Order 12866.
V. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS
certifies that this proposed regulation will not have a significant
economic impact on a substantial number of small entities. Today's
proposed rule would not impose any additional burdens or requirements
on small entities. Rather, the proposed rule simply clarifies the
authority of Federal savings associations to act as guarantor and issue
letters of credit. While the proposed rule also restricts the
circumstances under which Federal and state-chartered savings
associations may enter into surety and guaranty agreements, the
proposed restrictions are the minimum necessary for safe and sound
operations and should not impose a significant burden on small savings
associations.
VI. Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act), requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by state, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. The OTS has determined that
the proposed rule will not result in expenditures by state, local, or
tribal governments or by the private sector of $100 million or more.
Accordingly, this rulemaking is not subject to section 202 of the
Unfunded Mandates Act.
List of Subjects
12 CFR Part 545
Consumer protection, Credit, Electronic funds transfers,
Investments, Manufactured homes, Mortgages, Reporting and recordkeeping
requirements, Savings associations.
12 CFR Part 560
Consumer protection, Investments, Manufactured homes, Mortgages,
Reporting and recordkeeping requirements, Savings associations,
Securities.
Accordingly, the Office of Thrift Supervision amends chapter V,
title 12, Code of Federal Regulations as set forth below:
PART 545--[AMENDED]
PART 560--LENDING AND INVESTMENT
1. The authority citation for part 560 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3,
1828, 3803, 3806; 42 U.S.C. 4106.
[[Page 49877]]
Sec. 545.103 [Redesignated as Sec. 560.115]
2. Section 545.103 is redesignated as Sec. 560.115 and revised to
read as follows:
Sec. 560.115 Suretyship and guaranty.
(a) May a savings association act as surety or guarantor? To the
extent that a savings association has legal authority to do so, it may
enter into an agreement to act as surety or guarantor if the agreement
meets the requirements of this section.
(b) What is a suretyship or guaranty agreement? Under a suretyship
or guaranty agreement, a savings association is bound with its
principal to pay or perform an obligation to a third person. Under a
guaranty agreement, a savings association agrees to satisfy the
obligation of the principal only if the principal fails to pay or
perform.
(c) What requirements apply to these agreements? A savings
association may enter into a suretyship or guaranty agreement if the
agreement meets each of the following requirements:
(1) The savings association's obligations under the agreement are
limited to a fixed dollar amount and are limited in duration.
(2) The savings association's performance under the agreement would
create a loan or other investment that is authorized under applicable
law.
(3) The savings association's obligation under the agreement is
treated as a contractual commitment to advance funds to the principal
under Sec. 560.93 of this part and Sec. 563.43 of this chapter.
(4) The savings association must take and maintain a perfected
security interest in collateral sufficient to cover its total
obligation under the agreement.
(d) What collateral is sufficient?
(1) The savings association must take and maintain a perfected
security interest in real estate or marketable securities equal to at
least 110 percent of its obligation under the agreement, except as
provided in paragraph (d)(2) of this section.
(i) If the collateral is real estate, the savings association must
establish the value by a signed appraisal consistent with part 564 of
this chapter. The savings association must consider the value of prior
mortgages, liens or other encumbrances on the property, except those
held by the principal to the suretyship or guaranty agreement.
(ii) If the collateral is marketable securities, the savings
association must be authorized to invest in that security taken as
collateral. The savings association must ensure that the value of the
security is 110 percent of the obligation at all times during the term
of agreement.
(2) The savings association may take and maintain a perfected
security interest in collateral which is at all times equal to at least
100 percent of its obligation, if the collateral is:
(i) Cash;
(ii) Obligations of the United States or its agencies;
(iii) Obligations fully guaranteed by the United States or its
agencies as to principal and interest; or
(iv) Notes, drafts, or bills of exchange or bankers' acceptances
that are eligible for rediscount or purchase by a Federal Reserve Bank.
3. Section 560.45 is added to subpart A to read as follows:
Sec. 560.45 Suretyship and guaranty authority.
A Federal savings association is authorized to enter into an
agreement to act as surety or guaranty, subject to the restrictions in
Sec. 560.115 of this part.
4. Section 560.50 is added to subpart A to read as follows:
Sec. 560.50 Letters of credit and other independent undertakings--
authority.
A Federal savings association is authorized to issue letters of
credit and may issue such other independent undertakings as are
approved by the OTS, subject to the restrictions in Sec. 560.120 of
this part.
Dated: September 14, 1998.
By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-25022 Filed 9-17-98; 8:45 am]
BILLING CODE 6720-01-P
