Credit Union Legal Update – Fall 2004

    By , Credit Union

    Formation of a Charitable Foundation

    Credit Unions have a long history of caring and giving. Several credit unions have either created a charitable foundation or are researching the requirements to form a charitable foundation.

    The National Credit Union Association (NCUA) was recently asked if a federal credit union may form a non-stock, non-profit charitable foundation to support charitable causes within the community where the credit union operates. The short answer, according to NCUA, YES. A federal credit unions authority to make charitable contributions falls under its incidental powers and includes its ability to establish a charitable foundation to facilitate charitable giving.

    Generally speaking, the federal credit union reported to NCUA that they sought to create an institutional structure for its charitable giving and to facilitate long-term charitable objectives in their community. The federal credit union would provide initial funding for the foundation and future allocations as authorized by the federal credit unions board of directors. The charitable foundation would be organized to qualify as a tax-exempt entity under the Internal Revenue Code. Members of the federal credit unions management team and board of directors would initially fill the seats of the foundations board of directors. Thereafter, the foundations board would appoint successor directors under their bylaws.

    NCUA reiterated its position that federal credit unions have authority to make charitable contributions and donations. A federal credit union may make donations to non-profit recipients that are located in or conduct activities in communities where the federal credit union has a place of business. However, the board of directors may only approve of charitable donations that are deemed to be in the best interests of the federal credit union. The donations must be reasonable in size and amount and reflect the financial conditions of the federal credit union.

    Further, the federal credit union may also donate employees time to the foundation.

    NCUA reserved the right to review the foundations policies, assess the adequacy of controls and verify its financial statements or annual reports to evaluate the degree of risk, if any, the foundation may pose to the federal credit union. The tax-exempt status of the foundation must be maintained. The federal credit unions board must insure that less than a majority of their board of directors serve as directors on the foundations board to avoid any appearance of impropriety or conflict issues. A copy of this opinion letter can be downloaded in PDF format by clicking here.

    Electronic Membership Applications

    A federally insured credit union in California recently asked NCUA about the use of a members electronic signature. The credit union was using an electronic membership application and sought to rely on an electronic signature created by the member. Their procedures called for the credit union to retain a permanent file copy of the electronic version of the application. NCUA found that federal law provides for electronic documents and signatures and that such documents and signatures have the same validity as paper documents and handwritten signatures.

    For example, previously the credit union required a prospective member who had completed the online application form to print and sign the completed form and mail it to the credit union along with a photocopy of their valid drivers license. The credit union then audited the application, made images of the signed forms, and retained the original documents in off site storage. Based on the Electronic Signatures in Global and National Commerce Act (E-Sign Act) and the procedures set forth by the credit union, NCUA concluded that this federally insured credit union may rely on the electronic signature and need not require an applicant to print the form and sign it in handwriting.

    In a very thoughtful and thorough analysis of the E-Sign Act and the Truth and Savings rule, NCUA reminded all that further information is available on their website. They also referenced NCUA Regulatory Alert No. 01 RA 03. However, the state chartered credit union in question was encouraged to consult with local counsel regarding any applicable state laws since the E-Sign permits, under limited exceptions, states to modify or limit its provisions.

    Risk-Based Credit Card Accounts

    Risk-based lending continues to be the hot topic for credit unions. Recently, NCUA was asked if a federal credit union could establish different interest rates for credit card accounts based on differences in credit scores. Responding in the affirmative, NCUA noted that nothing in either the Credit Union Act or NCUAs regulations prohibits a federal credit union from offering a credit card program where it determines rates based on the credit profile of the member. Credit decisions based on a discriminatory basis are prohibited by the Equal Credit Opportunity Act.

    NCUA cautioned credit unions that since a member would not pay the rate for which they qualify until an application has been approved, numerous credit applications can impact an applicants credit score.

    The opinion letter also discussed the recent amendments to the federal Fair Credit Reporting Act which require additional disclosure requirements for risk-based pricing models involving a range of possible rates. Effective December 2004, a risk-based pricing notice is required if a credit union approves an application for credit but offers terms to the member that are ‘materially less favorable than the most favorable terms available to a substantial proportion of consumers.’ The notice must explain that the credit union is basing its terms on information in a credit report. The notice must identify the consumer reporting agency that provided the credit report, including contact information, and notify the consumer that they can request a free copy of the report. In all likelihood, the Federal Trade Commission and the Federal Reserve Board will issue a final regulation before the law goes into effect in December 2004.

    Facilities: 8 Rules for Leasing

    1. Hire the best land use/real estate attorney you can find to review your lease of purchase agreement. Dont use your business attorney or in-house counsel unless real estate is their specialty. If youre an attorney, hire another attorney. Brain surgeons dont operate on themselves.
    2. Hire a nationally networked broker. Make sure your broker is compatible with your attorney and your architect. The right broker knows the market and the listed and unlisted properties.
    3. Make sure your broker represents you, the buyer, exclusively. Request a written agreement that allows you to terminate your relationship while protecting the brokers fees in a transaction he or she introduced and you completed, within a specific length of time.
    4. Dont agree to an unlimited time of representation.
    5. Hire your real estate team (attorney, broker, architect) early. Implement and adhere to a schedule and define backup and contingency plans.
    6. Make sure your letter of intent to rent or purchase contains adequate time for the due diligence process.
    7. Dont allow the landowner to become your developer, contractor or architect unless you never want to see a full accounting of the cost
    8. Have your accountant review the agreement after your attorney reviews it. Then have your attorney review it again.

    This article originally appeared in Credit Union Facilities Strategies, Planning and Management: Volume 3. It has been reprinted with permission from the Credit Union E executives Society (CUES) and the author, Paul Seibert, CMC.

    Online Fraud

    The research group, Gartner Inc. recently reported on their review of banks (not credit unions) online and telephone banking systems. The research report focused on the growing problem of unauthorized access to checking accounts.

    A survey revealed that approximately 1.98 million individuals have experienced unauthorized access to their checking accounts during the past 12 months. Gartner estimated that the cost was approximately $2.4 billion in direct fraud losses, or an average of $1,200 per victim.

    At the present time, Gartner recommends ‘shared secret authentication’ as a good practical solution for strengthening access controls for online and telephone banking. Under this system the consumer shares a specific piece of information with the service provider. Gartner notes, however, that over the long term more effective tools are needed to detect fraud and stop checking accounts from being hijacked.

    Facilities: 17 Steps to Successful Building Recycling

    1. Recognize need for new operations facility two to three years in advance
    2. Hire the most competent, impartial consultant
    3. Complete detailed strategic retail branching/operations facility plans
    4. Understand the market and long-term projections
    5. Understand all delivery and operations occupancy alternatives and costs
    6. Develop site/building selection criteria that welcome all opportunities
    7. Engage an experienced commercial real estate agent
    8. Determine the cost of new facility options
    9. Complete comprehensive due diligence of each opportunity
    10. Review redevelopment ideas with local jurisdictions for approval
    11. Discover all rehabilitation costs
    12. Develop and analyze a rehabilitation/occupancy cost estimate
    13. Determine the marketability of vacant space
    14. Determine availability of adjacent land/buildings for future expansion
    15. Calculate total cost of occupancy and how it affects your bottom line
    16. Review the real estate contract with attorney and facility consultant
    17. If all is in order then purchase the property

    This article originally appeared in Credit Union Facilities Strategies, Planning and Management: Volume 2. It has been reprinted with permission from the Credit Union E executives Society (CUES) and the author, Paul Seibert, CMC.

    Federal ‘FairPay’ Rules to Allow Employers Greater Flexibility in Docking Pay of Exempt Employees

    The Department of Labor (‘DOL’) published final ‘FairPay’ regulations referred this past Spring modifying rules governing the payment of overtime for the ‘white-collar’ exemptions (executive, administrative and professional employees). The DOL claims the FairPay rules, which became effective on August 23, 2004, were implemented to provide clear, straight-forward (and stronger) overtime rules. Perhaps the most substantial change was a higher salary requirement of $455.00 per week for most exempt employees.

    One area in which employers will now have greater flexibility is in taking disciplinary actions involving suspension without pay of certain exempt employees. Prior to the new FairPay rules, employers who wanted to suspend exempt employees for inappropriate conduct like sexual harassment, violence or drug/alcohol use, were forced to either suspend the employee for an entire week or not at all. As of August 23, 2004, employers will have the latitude to suspend exempt employees without pay for one full day or more. The new regulations contemplate employers putting their disciplinary-deduction policies in writing before taking advantage of this expanded salary-deduction option.

    Most employers already have disciplinary policies or conduct rules in place for their employees. The FairPay regs do not require an exhaustive list of specific violations when a suspension without pay will be imposed, but the FairPay rules require a written policy sufficient to put employees on notice that they could be subject to an unpaid disciplinary suspension.

    Practical Pointer

    Required written policies regarding suspending exempt employees without pay is not the only area that the new FairPay rules suggest employer changes to written policies. For example, the DOL created a new ‘Safe Harbor’ rule to protect employers against inadvertent violations of the salary basis requirement for various overtime exemptions. However, this ‘Safe Harbor’ protection is only available if the employer has a clearly communicated policy prohibiting improper deductions, has a complaint mechanism in place and has a practice of reimbursing exempt employees for any wrongful deductions. Employers are well-advised to conduct a wage-hour self-audit which should not only include pay practices, but required changes to written policies. For help in this regard, call any member of the K&C Employment Team.

    Permissibility of Loan Participation

    A federal credit union recently asked NCUA if they could ‘participate’ in a banks indirect automobile lending program by purchasing a 100% interest in automobile loans originated by the bank and made to individuals who are not members of the federal credit union.

    The quick and immediate response from NCUA was NO. The proposed transaction was neither a permissible loan participation nor a permissible purchase of an eligible obligation. A federal credit union cannot purchase automobile loans originated by a bank unless the loans are to its members.

    NCUA stated that its regulations permit a federal credit union to purchase loans from any source, provided the borrower is a member and the loan is either of a type the federal credit union is empowered to grant or the loan is refinanced by the federal credit union within 60 days of its purchase. The NCUA rule imposes other restrictions, including an aggregate limitation on the amount of loans that may be purchased. The rules also require that a federal credit union may participate in a loan only if it is made to one of its own members, or someone who is a member of another credit union that is also participating in the transaction.

    Member Business Loan Regulation

    NCUA was recently contacted by the Missouri Division of Credit Unions with a request to clarify NCUAs position on Member Business Loans (MBL). NCUA replied that federally insured state-chartered credit unions (FISCUs) may only engage in business lending under NCUAs MBL regulations if an applicable state member business lending regulation has been approved by the NCUA Board.

    In its comprehensive analysis, NCUA reiterated that the Credit Union Membership Access Act of 1998 (CUMAA) was enacted to, among other things, amend the Federal Credit Union Act to impose a limit on the amount of outstanding MBLs made by federally insured credit unions (FICUs). After the enactment of the CUMAA, a FICU may not make any MBL that would result in a total amount of such loans equaling more than the lesser of: (a) 1.75 times the FICUs actual net worth; or (b) 1.75 times the minimum net worth required for a well capitalized FICU. There are several opportunities for exceptions to the aggregate limit. The NCUA Board has the sole authority to determine the qualifications for the exceptions to the aggregate limit.

    The opinion letter went on to state that all FICUs, including state-chartered credit unions, must comply with the federal statutes limitations on MBLs. Further, NCUA confirmed that the NCUA MBL rule states that the NCUA Board may exempt FICUs from the rule if NCUA approves a states MBL rule for its FICUs.

    All FICUs, including state-chartered credit unions, are encouraged to check with their regulator or local counsel on issues dealing with MBLs.

    Overdrawing the Share Account

    NCUA was recently asked about legal and procedural questions regarding the statutory lien provision of the Federal Credit Union Act. In the fact situation detailed in the letter from the NCUA Office of General Counsel, a credit union sought to overdraw a members regular share account or share draft account to credit the members overdue loan payment. The result could have created a negative regular share or share draft balance. NCUA concluded that the Federal Credit Union Act as well as the NCUA regulations do not permit a federal credit union to overdraw an account. A federal credit union may only create an overdraft if there is an agreement between the member and the federal credit union to that effect.

    The regulations define a statutory lien as a ‘a right in or claim to a members shares and dividends equal to the amount of that members outstanding financial obligations to the credit union, as that amount varies from time to time.’ NCUA concluded that it was clear from the language that a federal credit union may only impress the statutory lien on the existing balance in a members account, including dividends. You cannot use the statutory lien authority to create an overdraft or overdraw an account.

    Insurance Coverage For Living Trust Accounts

    Living Trust Accounts are insured under NCUAs revocable trust provisions in the share insurance regulation. The regulation provides for separate insurance of up to $100,000 per ‘qualifying’ beneficiary. A qualifying beneficiary is the spouse, child, grandchild, parent or sibling of the owner of the account.

    NCUA was recently asked to what extent NCUA share insurance coverage would apply for funds held in two accounts established by a member in connection with a living trust. The living trust in question had the account owners son and daughter as beneficiaries.

    NCUA responded that the interests of the son and daughter were each insured up to $100,000 separate from any individual accounts of the member or the beneficiary. Such share insurance coverage is available for the interests of qualifying beneficiaries in revocable trust accounts even if they are not credit union members. However, under the NCUA rules, either the settlor or the beneficiary of an irrevocable trust must be a member of the credit union.

    FEMA Guidelines

    The Federal Emergency Management Agency has published a primer on ‘Terrorism Risk Management in Buildings.’ It is available online by logging onto the FEMA Web site, then entering publication number FEMA 429 into the search option.

    Here is a sampling of some of the questions the publication poses as part of a screening to assess building vulnerability:

    • What critical infrastructure, government, military or recreation facilities are in the area?
    • In dense, urban areas, does curb lane parking place uncontrolled parked vehicles unacceptably close to a facility in public rights of way?
    • Are there trash receptacles and mailboxes in close proximity to the facility that can be used to hide explosive devices?
    • Has the security plan ever been tested and evaluated from a cost benefit and operational efficiency and effectiveness perspective?
    • Are threats, vulnerabilities and risks adequately defined and security countermeasures addressed and prioritized relevant to their criticality and probability of occurrence?
    • Has a security implementation schedule been established to address recommended security solutions?

    Et Cetera

    • NCUA examinations may soon include a review of a new trend of risk-based activities of a credit union. Credit unions strategic plans may be reviewed, questioned and evaluated. Every department in the credit union could need a business plan; an action plan; and a tactical plan.
    • State-charted federal credit unions should evaluate and clarify the information they file on IRS Form 990.
    • Some credit unions are establishing whistle blower policies under Sarbanes-Oxley.
    • NAFCU has completed a Check 21 Consumer Awareness Disclosure FAQ in response to member questions they were receiving.
    • Again under Sarbanes-Oxley, some credit unions are establishing policies dealing with document destruction/ disposal procedures and timetables.
    • Red flag disclosures and regulations are in progress regarding identity theft. Credit unions are encouraged to evaluate their current practices and procedures for change of address notices and perhaps confirm that the change of address notice was authorized.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2022.