Credit Union Legal Update – Spring 2005
Changes to Fixed Asset Regulation
The NCUA Board recently adopted a change that amends the fixed asset regulation. The fixed asset rule generally limits a federal credit unions investment in fixed assets to 5% of a federal credit unions shares and retained earnings. Requirements on the planning for, the use of, and the disposal of real property are also set forth. A new paragraph was added that contains a cross-reference to the RegFlex rules provision that federal credit unions qualifying for RegFlex treatment are exempt from the 5% rule. The final rule states that federal credit unions that have qualified under the RegFlex program, but thereafter no longer qualify for RegFlex lose their exemption and must comply with the Rule.
Another substantive change in the Rule, now provides that a federal credit union must accomplish partial use of its property within three (3) years of acquisition unless the federal credit union obtains a waiver from NCUA. The new regulatory change clarifies the position that waiver requests must be in writing and must be submitted to NCUA within 30 months of acquisition of the real property. The rule clarifies, once and for all, that partial use occurs when any federal credit union employee occupies some part of the property on a full-time basis.
The fixed asset regulation is sometimes a double-edged sword. Credit unions maintain that they need to purchase additional property to expand or at least protect their expansion opportunities. NCUA is concerned that some federal credit unions are too heavily invested in ‘unproductive assets.’ The underlying goal and objective of the rule is to insure that federal credit unions investments in fixed assets are properly planned and managed.
Leasing or purchasing of real property are not activities that most federal credit unions regularly undertake and professional assistance, including a qualified real estate broker and experienced commercial real estate attorney, are encouraged.
Proposed Regulatory Changes for CUSO Audits
NCUA recently issued a proposed regulatory change that will address credit unions that operate a wholly owned CUSO. Presently, the wholly owned CUSO is required to obtain its own annual audited financial statement from a Certified Public Accountant. Federal credit unions are also required to have an annual audit. The two audits (CUSO and credit union) would then ordinarily be combined so that there would be an annual consolidated audit. NCUA seeks to reduce the regulatory burden on credit unions and has proposed a regulatory rule change that would eliminate the requirement for the wholly owned CUSO to have a separate audit. Comments to the NCUA on the regulatory change are encouraged through May 23, 2005.
Expanded CUSO Services for Small Businesses
Many credit unions are considering the expansion of their services to include member business loans. Small business lending is also becoming more of a consideration for credit unions. Recently CUSOs and their activities have been in the news much more than they may have been in the past.
NCUA was recently asked if a federal credit union could invest in a CUSO that engages in a variety of activities that provide support to small businesses. NCUA responded in the affirmative. As proposed, a federal credit union would serve new and existing businesses by providing a variety of services that are expresslyauthorized under NCUAs CUSO rule. The activities include accounting services, income tax preparation, estate planning and retirement counseling. However, additional activities that were not specifically enumerated in the NCUA rules were also being considered. For example, financial planning was considered an activity provided by the CUSO, in addition to counseling regarding business plans, budgets, debt load and cash load as well as loan and grant offers. The CUSO would also provide expert testimony in tax deficiency hearings, counseling on the financial and tax implications of leasing as well the purchase of capital assets. Additional counseling on property and casualty insurance needs and the assessments regarding business assets and valuation of a business were also contemplated.
Currently, NCUA regulations provide that a federal credit union may invest only in those CUSOs ‘engaged in the preapproved activities and services related to the routine daily operations of credit unions.’ NCUA has previously provided a list of preapproved activity categories.
By interpreting legislative history, as well as some recent actions of NCUA, the office of the General Counsel of NCUA concluded that while the activities proposed were not specific examples under any of the preapproved activity categories in the CUSO rule, they fell within a broad category and relate to the routine, daily operations of credit unions. Accordingly, the investment was deemed to be a legal and permissible investment. Click here to download a copy of this article in PDF format.
Going Concern Valuations and Member Business Loans
Often, member business loans (‘MBLs’) involve a desire to purchase a small business. NCUA recently responded to an inquiry as to whether or not a federally insured credit union may use an appraisal based on the going concern of the business. In deciding to fund a member business loan where the main purpose of the loan was to acquire an existing business, some have sought to utilize the special appraisal method in calculating the loan-to-value (‘LTV’) ratio – the going concern of the business.
NCUAs MBL regulation provides that the LTV ratio for MBLs cannot exceed certain amounts. The rule defines the LTV ratio as the ‘aggregate amount of all sums borrowed . . . on an item of collateral divided by the market value of the collateral used to secure the loan.’ However, going concern valuation includes, among other items, goodwill as an integral component of the value of an ongoing and operating business enterprise.
NCUA expressed grave concern that the intangible business value of the business could decline. They also noted that a security interest could not be obtained based on going concern. NCUA concluded that inflating an appraisal by incorporating the going concern value would be inconsistent and improper under the MBL rules LTV ratio requirements. However, a waiver of the rules and requirements can be requested from NCUA.
NCUA cautioned that if a waiver was requested the credit union must use a loan officer experienced in MBLs. The loan officer would need to evaluate the borrowers ability to operate the business and maintain its going concern value. At a minimum, a competent business or intangible asset appraisal would be required. To download a copy of this article in PDF format click here.
20 Tips for ATM Use
Choosing an ATM
1. Where possible, use ATMs with which you are most familiar. Alternatively, choose well-lit, well-placed ATMs where you feel comfortable.
2. Scan the whole ATM area before you approach it. Avoid using the ATM altogether if there are any suspicious-looking individuals around or if it looks too isolated or unsafe.
3. Avoid opening your purse, bag or wallet while waiting for the ATM. Have your card ready in your hand before you approach the ATM.
4. Notice if anything looks unusual or suspicious about the ATM indicating it might have been altered. If the ATM appears to have any attachments to the card slot or key pad, do not use it. Check for unusual instructions on the display screen and for suspicious blank screens. If you suspect that the ATM has been interfered with, proceed to another ATM and inform the bank.
5. Avoid ATMs that have messages or signs fixed to them indicating that the screen directions have been changed. Banks and other ATM owners will not put up messages directing you to specific ATMs nor would they direct you to use an ATM that has been altered.
Using an ATM
6. Be especially cautious when strangers offer to help you at an ATM, even if your card is stuck or you are experiencing difficulty with the transaction. You should not allow anyone to distract you while you are at the ATM.
7. Check that other individuals in line keep an acceptable distance from you. Be on the lookout for individuals who might be watching you enter your PIN.
8. Stand close to the ATM and shield the keypad with your hand when keying in your PIN. Keying your PIN with the knuckle of your middle finger makes it more difficult for viewers to see the number entered.
9. Follow the instructions on the display screen, e.g. do not key in your PIN until the ATM requests you to do so.
10. If you feel the ATM is not working normally, press the ‘cancel’ key, withdraw your card and proceed to another ATM.
11. Never force your card into the card slot.
12. Keep your printed transaction record so that you can compare your ATM receipts to your monthly statement.
13. If your card gets jammed, retained or lost, or if you are interfered with at an ATM, report this immediately to the bank and/or police.
14. Do not be in a hurry during the transaction, and carefully secure your card and cash in your wallet, handbag or pocket before leaving the ATM.
Managing Your ATM Use
15. Memorize your PIN. If you must write it down, do so in a disguised manner and never carry it with your card.
16. Never disclose your PIN to anyone – family members, bank staff or police.
17. Do not use obvious and guessable numbers for your PIN, like your date of birth.
18. Change your PIN periodically, and, if you think it may have been compromised, change it immediately.
19. Set your daily ATM withdrawal limit at your branch at levels you consider reasonable.
20. Regularly check your account balance and bank statements and report any discrepancies to your bank immediately.
Can Multiple Credit Unions Share a Single Fidelity Bond?
In an effort to save time and money, the CUSO that provides management services for several credit unions sought to purchase a single fidelity bond naming all credit unions as insured. NCUA was recently consulted and concluded that such a procedure was not permissible. Each federally insured credit union must have its own individual bond coverage.The principal reason cited by NCUA for not permitting a credit unions bond to cover additional insureds was to make certain that the coverage of others did not in any way conflict or dilute the individual credit unions required coverage. Concern was also noted that additional insureds on the policy might create the possibility of exhausting coverage when confronted with single or aggregate loans loss limits. Again, NCUA regulations require that each federally insured credit union must be insured under its own individual bond. Click here to download a copy of this NCUA article in PDF format.
Cost Recoveries for Funding Employee Benefit Obligations with Life Insurance
NCUA was recently asked to clarify its long-standing policy which provides that a federal credit union may recover some of the costs incurred to invest in life insurance products which fund employee benefit programs. Specifically, NCUA was asked if a federal credit union could recover the total cost of funds rather than some of its costs. The answer was a resounding yes. The NCUA regulations do not apply to the investment restrictions of a federal credit union when the credit union is investing under its authority to provide and fund employee benefits. A federal credit union may purchase an otherwise impermissible investment to fund an employee benefit obligation. The sole requirement is that there must be a direct relationship between the investment and employee benefit obligation.
NCUA concluded that the cost of funds is a real cost of investing and that it should be recoverable under the Regs, however a federal credit union is prohibited from recovering opportunity costs on the money invested to fund employee benefits. While NCUA does not require a federal credit union to follow any particular methodology for calculating its cost of funds, credit unions may want to adopt an appropriate and perhaps conservative approach to the cost of funds analysis. Adequate documentation must be maintained to support the calculations. Should a credit union have any questions about this item or about the manner of calculations, NCUA should be consulted.
The NCUA ended its opinion by reiterating to all federal credit unions that they need to be careful and fully understand the nature and risks associated with all insurance products before investing in them. A copy of this NCUA article can be downloaded in PDF format by clicking here.
‘Empowered to Grant’
The phrase, ’empowered to grant’ is used in NCUAs loan participation rule as well as its RegFlex rules. Generally, NCUA has sought to limit a federal credit unions purchase of loans or participation in loans to those made to its own members. NCUA was asked to analyze and further clarify the phrase ’empowered to grant.’ NCUA maintained that the use of this term in its regulations refers to the authority of a federal credit union to make the type of loans permitted by the Federal Credit Union Act, NCUA regulations, federal credit union bylaws, and its own internal policies.
In a lengthy and detailed legal analysis, NCUA provided the history of the ’empowered to grant’ language and how it has been interpreted to date. NCUA did not change its position and its interpretation of the phrase ’empowered to grant’ was not modified.
NCUA did reiterate that a federal credit unions policies, or lack thereof, may limit the loans it is ’empowered to grant.’ Other limitations are found in the Federal Credit Union Act, NCUA regulations, and federal credit union bylaws. For example, the member business loans (‘MBLs’) regulations, as well as the loan participation and eligible obligation rules require a board of directors to adopt written policies. If a board does not wish to make MBLs or engage in loan participations, it need not adopt any policies. The NCUA legal opinion concluded, perhaps in a humorous fashion, by stating that a federal credit unions lack of written policies or limitations in its written policies regarding certain activities can be a source of self-imposed limitations on the loans a credit union is ’empowered to grant.’ Click here to download a copy of this NCUA letter in PDF format.
Split Dollar Life Insurance
Employers nationwide sometimes utilize a split-dollar life insurance program as an employee benefit or an incentive to employee hiring and retention. NCUA was recently asked if a federal credit union could use a split-dollar life insurance program to fund various employee benefit obligations. The split-dollar arrangement would be owned by the employee and paid for by the credit union. As proposed, the credit union would treat the split-dollar arrangement as a nominal loan for the employee to satisfy IRS regulations and obtain favorable tax treatment. Based on this arrangement and other specific details applicable to the employee, NCUA did not object to the concept. A copy of this NCUA letter can be downloaded in PDF format by clicking here.
5 Steps to Reduce Employment Law Liability in ’05
With employee claims and litigation on the rise, employers are well-advised to review their employment policies and practices with an eye to reducing potential liability. To this end, many employers are conducting comprehensive self-audits either with or without the help of outside professionals. Recognizing that every employer is not in a position to conduct more extensive self-audits, here are 5 suggested steps for employers to take given recent changes in the legal environment:
1. Review pay practices as to salaried, exempt employees.
The new FairPay regs which went into effect in 2004, changed the rules as to when certain employees will be exempt from overtime. Commonly known as the white-collar exemptions, executive, administrative and/or professional employees were all affected by these new rules, so it makes good business sense to ensure that your pay practices are in compliance. Keep in mind that wage-hour claims are becoming more and more popular among lawyers who sue employers and mistakes in this area can be very costly.
2. Review/update employee handbooks.
First, make sure your company has an employee handbook. Some employers have a misconception that not having an employee handbook will somehow place them in a better legal position. This is not the case, and employers need to make sure that they update handbooks. Such an update is particularly important in 2005. The FairPay regs provide benefits to employers who have certain written policies in place. Other areas, including workplace harassment, FMLA leave, equal employment opportunity, discipline & discharge, and employment-at-will, should all be covered.
3. Consider training supervisors.
Generally a companys policies are implemented through its supervisors. What supervisors say and do can, and many times does, create legal liability for employers. Accordingly, training supervisors in areas such as workplace harassment, the dos and donts of hiring, effective evaluation techniques and consistent handling of discipline is something that every employer should consider.
4. Monitor Internet usage and policies.
As computers become more and more an integral part of most businesses, workplace liability related to computer usage is increasing. Employers have every right to monitor employees use of company computers to make sure they are being used for proper business reasons, but employees should be informed that what they do on company computers may be reviewed and may lead to disciplinary action. Accordingly, employers should maintain email and Internet usage policies and make sure that appropriate security measures are in place to prevent computer misuse or theft of information maintained in company computers.
5. Review documentation practices.
Even employers who are doing all the right things may have trouble defending against employee claims if employment actions are not properly documented. Companies should make sure their supervisors are trained to consistently document all employment actions. Consider making documentation efforts part of a supervisors duties and evaluate how effective he/she is in this area. Not only should employee files be reviewed for having necessary documentation, but unnecessary/inappropriate documentation inadvertently placed in those files should be removed.
Reprinted from Kaufman & Canoles’ Winter 2005 Employment Law Update
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.