Credit Union Legal Update – Fall 2006
Revised and Updated Federal Credit Union Bylaws
Concluding nearly a year of analysis and evaluation, NCUA recently adopted revised federal credit union standardized bylaws. In general, the new bylaws use plain English for easier understanding and the format was modified to include subheadings to more quickly navigate pertinent sections.
Additionally, credit unions have been granted greater flexibility in various sections of the bylaws.For example, the bylaws institute a requirement for credit unions to establish a policy regarding board member education in light of the post-Sarbanes-Oxley era, but they do not prescribe any particular training. The appropriateness of a training program will vary by credit union. Also, staff commentaries are now included at the end of some bylaw articles to address frequently asked questions.
Other highlights include:
- Section headings for ease of finding provisions pertaining to a particular topic
- Increasing from 500 to 750 the maximum number of signatures that may be required to call a special meeting
- A provision requiring notification of members of the rules of order and procedures that a federal credit union would use when conducting member meetings. (A federal credit union must use one of the following: Democratic Rules of Order, The Modern Rules of Order, Roberts Rules of Order, or Sturgis Standard Code of Parliamentary Procedure).
- The bylaws retain the following four voting options:
- In-person elections; nominating committee and nominations from the floor.
- In-person elections; nominating committee and nominations by petition.
- Election by ballot boxes or voting machines; nominating committee and nominations by petition.
- Election by electronic device or mail ballot; nominating committee and nominations by petition.
- Clarification that immediate family members of directors or committee members, and the combination of both, cannot constitute a majority of directors on a federal credit unions board.
- Clarification of the requirement that federal credit union directors fill vacancies on the board of directors, credit committee and supervisory committee as soon as possible rather than the previous designation of within a reasonable time.
- Clarification that a management official or assistant management official is permitted to serve on the board of directors but he or she may not serve as the chair.
- Clarification that the Federal Credit Union Act permits boards to appoint executive committees. However, the boards must be specific in their delegations to executive committees.
- A section that notes that a director and committee members are allowed access to the federal credit unions books and records, but only in situations where they have a proper purpose, which is consistent with current NCUA policy.
Clearly, the above is merely a highlight of some of the provisions of the revised and updated standard bylaws which became effective April 26, 2006.
Once a standard bylaw has been revised, a federal credit union still needs approval from NCUA for future changes to that revised bylaw. For a nonstandard bylaw, please also review the sections and provisions in the standard bylaws on what the requirements are to get a bylaw amendment approved.
Preferential Loan Rates to Employees but Not to Directors
NCUA was recently asked if a paid employee, who also served as a volunteer and unpaid member of the credit committee could receive or benefit from a loan program offered to credit union employees. Apparently, the credit union that contacted NCUA had implemented a program where all credit union employees received a loan rate reduction of 1% on consumer loans and on mortgage loans.
The question posed to NCUA was whether or not, if one was a member of the credit committee, and also an employee, could the reduced loan rate be offered to that individual? NCUA emphatically answered in the negative. A credit union cannot offer preferential loan rates to any of its officials.
A credit union official includes any member of the Board of Directors, the Credit Committee or the Supervisory Committee. The NCUA rule prohibits preferential treatment of officials regardless of whether or not they are employees or receive compensation. The rule is intended to limit insider dealing and would not be effective if employees/officials could receive preferential loan rates as part of their employee compensation.
NCUA Offers Clarification
The NCUA Opinions of General Counsel are generally very clear, thorough, and exceptionally well written. It is rare for a clarification to be sought. One exception to this view was a recent letter where a credit union attorney sought clarification from NCUA to an opinion which NCUA had offered to another credit union attorney. As was reported in the last issue of Credit Union Update, NCUA issued an opinion that addressed the question of whether or not a CUSO could invest in a non-CUSO that provides title insurance services. The NCUA Office of General Counsel Opinion was recently supplemented and clarified.
NCUA stated that the prior letter only concerned investments by CUSOs in a non-CUSO service provider. It did not address investments by credit unions in CUSOs. A federal credit union may invest in a CUSO whose owners include parties that are not credit unions. The CUSO must primarily serve credit unions, the credit unions membership, or the membership of credit unions contracting with that CUSO.By clicking here, you can view a copy of the NCUAs opinion letter.
Top Ten Developments/Trends in the Credit Union Movement
Credited to John A. Vardallas, Founder/CEO of The American Boomer (www.theamericanboomer.com)
- Fewer, but larger credit unions.
- More reaching out to minority/ethnic markets.
- Erosion of the common bond/trend toward open membership and greater competition among credit unions.
- Greater need for credit unions to establish lifetime/life stage relationships with members.
- Security issues & controls will become increasingly paramount.
- Small business services will represent a significant growth area.
- Less face-to-face contact with members.
- Financial transactions by telephone and online will increase (more click and less mortar).
- Credit union members will become investors, not just savers (average age of members is 47 years).
- Success will come to credit unions who are most knowledgeable about their members!
Etc., Etc., Etc.
- All credit unions, both state-chartered and federally-chartered, should be aware that to insure consistent application of the BANK SECRECY ACT all banking agencies, including NCUA and all state banking agencies have released the Bank Secrecy Act/Anti-Money Laundering Examination Manual. The Examination Manual and related documents are available at www.ffiec.gov/pdf/bsa_aml_examination_manual2006.pdf
- EMERGENCY RESPONSE PLANNING: A Critical Investment. In recognition of disaster recovery planning/emergency response planning, Kaufman & Canoles partner, David B. Graham, and Operations Director, Thomas D. Johns, have published a comprehensive treatise on the needs, requirements, and some suggestions that should be included in any emergency response plan. Click here to view this article online. NCUA has sent to all federally insured credit unions Letter 06-CU-12, which is a new exam questionnaire for reviewing disaster preparedness and response efforts.
- Are your examiners demanding a recent appraisal of credit union owned property? If so, consider contacting your commercial real estate broker and request an Opinion of Market Value. This is not be confused with an appraisal performed by a Member of the Appraisal Institute (MAI) but is much less expensive. More importantly, opinions of market value are often readily accepted by NCUA examiners.
- Dont forget to alert your credit union lawyers who handle mortgage foreclosure or litigation that under a recent 4th U.S. Circuit Court of Appeals Case the lawyers may be debt collectors under the Fair Debt Collection Practices Act and failure to comply with the law could possibly create liability for the lawyer and maybe even the credit union. See Wilson v. Draper & Goldberg, No. 05-1392 (April 5, 2006).
- 10 Consumer Tips for ATM Safety and Security. Only about 10 to 12% of all ATM transactions are deposits. Perhaps this percentage of use is low because people are not comfortable making deposits at an ATM or, perhaps, it is because consumers are concerned about ATM safety and security. See the Fall 2005 issue of Credit Union Update for a list of suggestions to make an ATM site safer and perhaps increase deposits. A copy of the Fall 2005 Credit Union Update can be viewed online by clicking here.
- Subprime Indirect Lending Alert. Subprime loans, according to NCUA, are loans to borrowers with weakened credit histories that include payment delinquencies, charge-offs, judgments, or bankruptcies. They may also display a reduced repayment capacity as measured by credit scores and debt-to-income ratios. NCUA has issued an alert and notified all federally insured credit unions of a heightened concern that those credit unions participating in third-party subprime indirect lending may not have effective controls. As a result of NCUA heightened concern, credit unions are reminded that their examiners will be contacting them to discuss controls and practices and these issues may also be addressed on the next on-site examination. For further information, see NCUA Risk Alert No. 05 RISK-01.
Member Business Loans and the Definition of Value
As Member Business Loans (MBLs) become more and more of the standard rather than the exception to many products offered by credit unions, NCUAs rules and regulations on MBL rules and regulations are being more carefully read and scrutinized.
Recently, NCUA was asked to clarify the word value as used in the MBL Regulations dealing with collateral for floor plans. NCUA was asked if the retail, loan, or trade-in value of the collateral is market value for the purpose of meeting the 80% loan-to-value ratio requirements in the regulations.
NCUA concluded loan-to-value ratios in credit union business lending for floor plan collateral are best determined using the wholesale value in dealer-to-dealer sales contracts, rather than retail value, loan value, or trade-in value.
NCUA reiterated that MBLs collateral provides a secondary source of repayment if the borrower defaults on the loan. The consistent use of wholesale value in calculations is much better than utilizing a retail value.
However, always leaving the door open, NCUA concluded that there may be circumstances where a credit union could justify using a value other than a wholesale value but it would have to substantiate the alternative value in discussions and documentations with the regional director.
Role of the Supervisory Committee
Although the Supervisory Committee is appointed by the Board of Directors, they serve as an independent body with full authority to retain separate legal counsel and, should they so desire, to act to remove a member of the Board of Directors or the entire Board of Directors.
NCUA was recently asked about the role of the Supervisory Committee following the removal of the entire Board of Directors. Apparently, the writer sought a determination from NCUA as to what action NCUA would take if the members of a federal credit union voted to recall or remove all of the credit unions directors. NCUA stated that it is and has been the long-standing NCUA position that in the event that an entire board of directors is removed, the federal credit union Supervisory Committee has the responsibility to serve as an interim board until the Supervisory Committee schedules an election of directors by the members.
Nonprofits and Sarbanes-Oxley
There are 10 general principles of corporate governance emerging from the Sarbanes-Oxley reforms, which may be worthy of consideration for the governance of credit unions and other nonprofit organizations:
- Principle 1 – Role of Board: The organizations governing board should oversee the operations of the organization in such manner as will assure effective and ethical management.
- Principle 2 – Importance of Independent Directors: The independent and non-management board members are an organizational resource that should be used to assure the exercise of independent judgment in key committees and general board decision making.
- Principle 3 – Audit Committee: This Committee should be effective and independent but also reasonably cooperative.
- Principle 4 – Governance and Nominating Committees: An organization should have one or more committees, composed solely of independent directors, that focus on core governance and board composition issues, including: the governing documents of the organization and the board; the criteria, evaluation, and nomination of directors; the appropriateness of board size, leadership, composition, and committee structure; and codes of ethical conduct.
- Principle 5 – Compensation Committee: An organization should have a committee composed solely of independent directors that determines the compensation of the chief executive officer and determines or reviews the compensation of other executive officers, and assures that compensation decisions are tied to the executives actual performance in meeting predetermined goals and objectives.
- Principle 6 – Disclosure and Integrity of Institutional Information: Disclosures made by an organization regarding its assets, activities, liabilities, and results of operations should be accurate and complete, and include all material information. Financial and other information should fairly reflect the condition of the organization, and be presented in a manner that promotes rather than obscures understanding. CEOs and CFOs should be able to certify the accuracy of financial and other disclosures, and the adequacy of their organizations internal controls.
- Principle 7 – Ethics and Business Conduct Codes: An organization should adopt and implement ethics and business conduct codes applicable to directors, senior management, agents, and employees that reflect a commitment to operating in the best interests of the organization and in compliance with applicable law, ethical business standards, and the organizations governing documents.
- Principle 8 – Executive and Director Compensation: Executives should be compensated fairly and in a manner that reflects their contribution to the organization. Such compensation should not include loans, but may include incentives that correspond to success or failure in meeting performance goals.
- Principle 9 – Monitoring Compliance and Investigating Complaints: An organization should have procedures for receiving, investigating, and taking appropriate action regarding fraud or noncompliance with law or organization policy, and should protect whistleblowers against retaliation.
- Principle 10 – Document Destruction and Retention: An organization should have document retention policies that comply with applicable laws and be implemented in a manner that does not result in the destruction of documents that may be relevant to an actual or anticipated legal proceeding or governmental investigation.
(From Guide to Nonprofit Corporate Governance in the Wake of Sarbanes-Oxley by the American Bar Association Coordinating Committee on Nonprofit Governance.)
Indirect Lending Terms
Kaufman & Canoles is honored to represent the Credit Union Auto Loan Network LLC, a very successful CUSO of credit unions in Maryland, District of Columbia, and Virginia. This CUSO has entered into a contract with Aimbridge which has resulted in a strong indirect lending program. In conjunction with the indirect lending program there are often questions about a term or a concept. The following glossary of indirect lending terms should be of benefit to all. To learn more about this CUSO, please contact Sallylou Cloyd at 443-386-7473 or firstname.lastname@example.org.
- Adds/add-ons – options not shown in NADA book, i.e. LoJack; road hazard insurance
- Approval as called – loan is approved exactly as the dealer presented it
- ATPI – agreement to provide insurance
- Back-end products (b/e) – warranty and insurances
- BK – bankruptcy
- Buy down – When the dealer contracts the member at a lower rate than approved, and pays the difference in the interest income directly to the credit union
- Book – the valuation service for used autos
- Book-out – to calculate the value of a used auto using NADA information
- Buried – refers to someone who owes a lot more on the vehicle they want to trade than it is worth
- Buy rate – This is the interest rate that banks or financing institutions will charge on all contracts being financed; it is a secret number between the lender and the dealer which is the real amount of the interest rate that the loan starts out at before the dealer increases it for its own extra profit
- Call – how the dealer submits the loan structure – cash price, down payment, term, etc.
- Capture ratio – ratio of approved loans to funded loans
- Co-x – co-borrower/joint applicant
- Credit tier – arbitrary groups of credit scores to drive applications into appropriate approval criteria; Scores of 740+ are rated A+; Scores of 700-739 are A; Scores of 670-699 are B; Scores of 640-669 are C; Scores of 600-639 are D
- CUALN – Credit Union Auto Loan Network – network of credit unions which has an agreement to do business with a network of dealerships
- DLR – dealer
- F & I – Finance and Insurance – the person at the dealership who sets up customer financing and sells insurances
- Flip – to convert a buyer from financing his automobile through his own bank or credit union to financing through the dealership
- Franchise dealer – sells new and used vehicles, is related to a manufacturer – these dealerships will have manufacturer names in their dealership name, and manufacturer logos at the dealership
- Free and clear – a trade-in vehicle which has no liens
- Funded loan – a loan that has been through compliance and the dealer funded
- Independent dealer – dealership that sells only used cars and is not related to a particular manufacturer; could also be called a non-franchise dealer
- Look-to-book or Book-to-look ratio – ratio of applications to funded loans
- LTV – Loan To Value – the loan amount requested divided by the value of the vehicle, expressed as a percentage
- Max call/maximum call – approved amount is the maximum the credit union will finance
- Negative equity – the trade-in vehicle has a fair market value that is less than what is owed on it
- On-the-road – the amount to finance which includes TTL and b/e products
- PAA – paid as agreed
- Plus, plus, plus (+++) – plus tax, tags, and back-end products
- P.O. – purchase order
- POI – proof of income
- POR – proof of residence
- Prime paper – high beacon score, over 600, little or no delinquency
- QUD – dealer was funded by Aimbridge
- Quick loan – a program utilized by dealers to obtain quick funding if certain credit criteria are met
- Rehash – dealer wants a different decision than he got – for example, an approval instead of a decline, or more money than was approved. The rehash should present additional information or argument for the improved call
- Reserve – amount that the financial institution pays the dealer for setting up the loan; sometimes negatively referred to as a kickback
- Short fund – when part of the funds due is not paid to the dealer in order to cover a late first payment or a rate buy down
- Spot – all purchase and delivery is done on the same day, sometimes without actually securing financing
- Straw purchase – when the vehicle is purchased by someone who is not to be the primary driver, for someone who is not on the loan, other than a spouse or minor child
- Structure – how the amount financed is reached – the cash price, TTL, b/e, cash down, trade
- Sub-prime paper – low beacon score, less than 600, history of serious delinquency
- TT – tax and tags
- TTL – tax, tags, and license fees
- Turn time – the time from application entry to decision
- Upside down – a condition of having negative equity
- VOI – Verification of income
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 2019.