Credit Union Legal Update – Spring 2006
Credit Union Vendor Endorsements
2005 concluded with NCUA issuing another opinion on federal credit union (FCU) vendor endorsements. In a letter dated December 29, 2005, NCUA addressed whether it was proper for a FCU to provide endorsements of products or services offered by third-party vendors. Although endorsements could put a credit unions reputation at stake, NCUA concluded that nothing in the Federal Credit Union Act or the NCUA Rules and Regulations prohibit vendor endorsements.
NCUA explained their position by noting that a recommendation based on a FCUs experience with a vendor could be useful to other credit unions considering a particular product or service. Endorsements from satisfied customers are common in the marketplace and assuming an endorsement is offered in good faith, NCUA believes they present minimal risk.
As noted in the article below, the practice is similar to a ‘finder activity.’ A FCU may act as a finder and introduce or bring together its members with third-party vendors so the two parties can negotiate and consummate transactions.
Before a vendor is endorsed by a credit union, the credit union is encouraged to perform adequate due diligence to ensure that the vendor is reputable. Click here to view a copy of this NCUA opinion letter.
Promotional Material to Members of Third-Party Vendors
NCUA recently responded to questions seeking guidance on vendor endorsements. For example, NCUA was asked if a FCU could legally send promotional material from an investment brokerage firm along with the credit unions monthly account statements and newsletters. NCUA considers these occurances affirmative ‘legal finder’ activities for FCUs. A FCU may act as a finder and introduce or bring together its members with third party vendors so the two parties can negotiate and consummate transactions. Some examples of finder activities include providing advertising space on a FCUs web site, on ATM receipts, in a credit unions newsletter, or in promotional materials included with account statements and newsletters.
Some may view the ‘endorsement’ of a particular vendor to be a questionable act that could potentially damage a FCUs reputation. FCUs are cautioned to exercise good judgment in promoting the products and services of third parties.
NCUA concluded that if members have concerns about a vendor that a FCU is promoting, the members are encouraged to raise their concerns with the credit unions board of directors. A copy of this NCUA opinion letter is available by clicking here.
What is the Meaning of Fleet Under the Member Business Loan Regulation?
As credit unions strive to provide quality services to their members, member business services are becoming more and more in vogue. NCUAs Member Business Loan (MBL) rule provides that a credit union may make MBLs secured by certain consumer-type vehicles without complying with the rules loan-to-value ratios provided the vehicle is not part of a fleet.
NCUAs Region III was recently asked to define the meaning of fleet and further interpret the MBL rule. A ‘fleet’ covers two or more vehicles used in a business if the business is transportation. For example, where the business provides some form of transportation (i.e., taxis, limousines, or vans). However, the meaning of ‘fleet’ may also include two or more vehicles used to support the operations of a business (i.e., delivery companies). Such vehicles would clearly be considered a fleet and subject to the MBL rule. NCUA also noted that fleet vehicles depreciate at a faster rate than personal use vehicles.
After explaining and defining NCUAs definition of fleet, NCUA stated that a credit union may request a waiver of the general loan-to-value requirements under the MBL rule for a fleet of vehicles, however, it is up to the region to determine if a waiver is appropriate. By clicking here, you can view a copy of the NCUAs opinion letter.
Member Business Loan Rule and Commercial Vehicle Leases
As noted in the preceding article, the MBL rule continues to receive great attention from both credit unions and NCUA. Recently NCUAs Office of General Counsel was asked their opinion on whether or not the MBL rule applies to a credit union loan for the financing of a commercial vehicle lease. NCUA concluded that the MBL rule, subject to certain exceptions, applies to any loan, line of credit, or letter of credit where the borrower uses the proceeds for a commercial, corporate, or business purpose.
It was argued before NCUA that a loan to finance a commercial vehicle lease cannot meet the loan-to-value ratio requirements of the MBL rule. NCUA agreed and suggested that the credit union request a waiver from the region.
NCUA has previously recognized the authority of FCUs to finance the leasing of vehicles. However, if the purpose of the loan makes it subject to the MBL rule, (i.e. a loan to finance the lease of a vehicle for a commercial use) the loan must unequivocally comply with all terms of the MBL rule.
In summary, NCUA concluded that the MBL rule applied to commercial vehicle leases. If the Regional Director grants a waiver from the MBL requirements, the Director must also conclude that it was proper to consider if the values assigned adequately addressed safety and soundness considerations. Click here to view a copy of the NCUAs opinion letter.
Cash Flow as Collateral for MBLs
In yet another request for interpretation or guidance regarding MBL rules, NCUA was asked whether a borrower could assign cash flow as collateral to satisfy the loan-to-value requirements of the MBL rule.
As mentioned above, with few exceptions, the MBL rule requires all MBLs to be secured by collateral. This ensures that credit unions have a secondary source of repayment if a borrower defaults. The MBL rules general loan-to-value requirement is a maximum of 80%, although higher limits are permitted under certain circumstances. The term ‘value’ in the rules definition of ‘loan-to-value ratio’ is defined as the market value of collateral used to secure a loan.
In an opinion letter by NCUA dated February 8, 2006, NCUA stated that the MBL rule does not specify the kinds of collateral a borrower may use to satisfy the loan-to-value requirement, but that the collateral must have an ascertainable market value. Otherwise, the requirements of the MBL rule are not met.
Cash flow may be assigned as collateral for an MBL if its market value can be established and if its value is sufficient to meet the rules for loan-to-value requirements. Otherwise, a credit union may request a waiver from the NCUA Regional Director. A copy of this NCUAs opinion letter is available by clicking here.
Denial of Services
‘Once a member always a member’ is a foundation of the credit union movement. However, what can a credit union do when an account holder is not a member but seeks to utilize credit union services as a joint account holder? Recently NCUA was asked if a FCU can limit or prohibit services to a joint account owner who is not a member of the FCU. Although such a prohibition would limit the ability of members to name persons as joint owners, NCUA agreed that a FCU can prohibit services to a nonmember joint account holder, provided that there is a reasonable basis for taking this action. The credit unions policy should be established in writing and brought to the attention of the members and cannot violate federal and state nondiscrimination laws.
This NCUA ruling was brought on when a former employee of a FCU was charged with a felony after defrauding the FCU. The former employee voluntarily closed his/her account but continued as the joint owner on accounts owned by members of the former employees family. Serving as a joint owner entitled the former employee to utilize credit union financial services, including cashing of checks and money orders. Since the former employee had been charged with a felony and the credit union had suffered losses as a direct result of the former employees actions, it seemed absurd to extend member benefits as a joint account holder to the former employee.
The FCU in question had a policy that provided for withholding services from members who have caused a loss to the credit union. Standard FCU bylaws provide that a person who withdraws all shares ceases to be a member and therefore is not entitled to services. However, the rights and responsibilities of a joint owner who caused a loss to a credit union was not addressed in the bylaws.
In this case of first impression, the Office of General Counsel of NCUA issued an opinion that a FCU can place limitations on a members ability to name joint owners as long as it had a reasonable basis to act. NCUA concluded that a FCU may limit the ability of members to name as joint owners any person who has caused a loss.
Again, the FCU should establish a written policy and ensure that members are aware of it and that its application does not violate federal and state nondiscrimination laws. By clicking here, you can view a copy of this NCUA opinion letter.
Can a CUSO Invest in a Non-CUSO Service That Provides Title Insurance Services?
A FCU recently sought guidance as to whether a proposed activity was a permissible CUSO activity. Apparently, the CUSO is currently established and offers real estate brokerage services to credit union members. This CUSO sought to acquire 20% of the outstanding issued shares of a title insurance agency. The question to NCUA was whether or not the purchase and ownership of shares in the closely held title insurance agency was a permissible activity. NCUAs answer – a resounding no. A CUSO may only invest in a non-CUSO service provider if its investment is necessary to receive a non-CUSOs services or to receive a reduced price for goods or services.
NCUA stated that it was a permissible activity for a CUSO to invest in a non-CUSO service provider if the amount invested was limited to the amount necessary to participate in this service provider, or at a greater amount, if it was necessary to receive a reduced price for goods or services.
Under the facts presented, NCUA concluded that it was not necessary for the CUSO to acquire any amount of shares in the title insurance agency to obtain the title insurance agencys services and thus the proposed investment in the agency was neither proper nor permitted. A copy of this NCUA letter is available by clicking here.
Business Continuity Planning
Business Continuity Planning is the newest buzz word. Previously credit unions addressed this issue as disaster recovery planning.
The Regional Director for NCUA Region II recently undertook a unique approach and issued a guidance letter to all federally insured credit unions regarding information technology business continuity planning.
The Regional Director issued a reminder that Hurricane Katrina closed 139 federally insured credit unions in Louisiana, Mississippi and Alabama. These 139 credit unions represented $3.4 billion in assets. Ultimately, those credit unions with basic business continuity plans in place were able to return to normal operations sooner than those credit unions without a viable plan.
The primary resource for business continuity planning guidance is the Federal Financial Institutions Examination Council Business Continuity Planning IT Examination Handbook (FFIEC IT Handbook). Credit unions are encouraged to review the FFIEC IT Handbook which is available electronically at https://ithandbook.ffiec.gov/.
NCUA strongly urged that a FCUs board of directors address the challenges of developing an effective business continuity plan. The boards of large credit unions were encouraged to appoint a business continuity plan committee and/or manager to oversee its development, testing, and reporting.
At a minimum, credit unions are encouraged to complete the following business continuity plan action steps:
- Conduct a Business Impact Analysis,
- Conduct a Formal Risk Assessment,
- Develop the Business Continuity Strategies,
- Develop the Business Continuity Plan,
- Test and maintain the Plan.
Credit unions should monitor their business continuity plans and expect their examiners to review and scrutinize business continuity plans in upcoming examinations.
The Lenders’ Forum
Kaufman & Canoles is sponsoring the first in a series of Lenders’ Forums on April 20, 2006, from 11:30 a.m. until 1:30 p.m. at the firms Norfolk office. The Honorable Kenneth W. Stolle will present a ‘Legislative Update,’ a discussion of the issues addressed in the 2006 session of the General Assembly.
The Kaufman & Canoles Lenders’ Forums are designed to present timely issues of interest to banking and lender executives. Networking time will be provided before the program, to be followed by a luncheon and Senator Stolles presentation. Because of space limitations, registration is limited to those banking and credit union executives in a chief executive role. For more information contact Stephanie Dunbar at 757.624.3216.
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.