Credit Union Legal Update – Summer 2012
By , Credit Union
Loan Participation Contact Checklist
Loan participations have become important tools for credit unions to consider. When properly executed, loan participations tend to boost lending and increase profits during low loan demand. According to some recent reports from NCUA, nearly 1,500 federally-insured credit unions have reported activity in loan participations with total balances of nearly $13 billion.
NCUA requires that those credit unions involved in loan participations enter into a written master participation agreement. However, NCUA has not provided any guidance as to what should or should not be included in the master participation agreement. The following are some suggested contract issues that should be considered as part of the due diligence analysis of a loan participation loan.
- Identification of roles and responsibilities of all parties involved
- Verification that all parties have performed independent financial analysis including valuation of assets pledged
- Requirement that each loan participant has reviewed the loan documents prior to closing
- Identification of loans sold with and without recourse
- Guarantors, if any, identified and appropriate due diligence
- Attention to servicing issues
- Buy-back rights
- Notice provisions
- Servicer rights, including fees, delinquencies, right to modifications
- Privacy and confidentiality issues
- Brokers rights and responsibilities/payments
- Voting rights
- Custody of loan documents
- Separate trust accounts for funds
- Statutory liens
- Prepayment penalty
NCUA’s List of Required Policies for Board of Directors of Credit Unions
To view the NCUA’s list of required policies for Board of Directors of credit unions, click here.
Most understand and acknowledge the fundamental principle that a Board member of a federal credit union is a volunteer who serves without compensation. What is defined as compensation? Is an award to recognize their service compensation, and if so, how large can the award be? Section 701.33 of the NCUA rules and regulations addresses reimbursement, insurance and indemnification of officials. Generally speaking, the rule is that only one Board officer may be compensated as an officer of the Board. The bylaws must specify the officer to be compensated, as well as the specific duties of each of the Board officers. No other official may receive compensation for performing the duties or responsibilities of the Board or a committee position to which the person has been elected or appointed.
The NCUA rule is silent on awards or gifts. However, the rule does provide that compensation does not include the reasonable and proper costs incurred by an official in carrying out the responsibilities of the position, if the payment is determined by the Board of Directors to be necessary or appropriate in order to carry out the official business of the credit union. The payment must also be in accordance with written policies and procedures, including documentation requirements, established by the Board of Directors. Payments may include the payment of travel costs for officials, and one guest per official.
In a relatively recent NCUA opinion, the Office of General Counsel concluded that a $250 Visa gift card to be awarded as a volunteer service award to a director or committee member for a substantial length of service of five years or greater was acceptable. NCUA concluded that the award does not constitute compensation so long as the award is nominal in value and proportionate to the period of service it covers. Previously (1993), NCUA concluded that a gift with a maximum value of $50 per year was acceptable since it was nominal.
Board members and committee members volunteer because they want to serve, help and assist. Unlike some bank directors, credit union officials do not seek compensation. It seems challenging to identify whether or not even a Christmas gift could be viewed as compensation. If it is a nominal value, a gift should not be found to be compensation.
What are credit unions to do? Although there is very little written on the subject, a standard of $50 per gift would presumably be viewed as a nominal gift. A copy of this opinion of the General Counsel can be downloaded in PDF format by clicking here.
Truth-In-Lending – Still Hyper-Technical
In a recent federal court case dealing with Truth-In-Lending and Notices of Rescission, the presiding Judge wrote, In the world of the Truth-In-Lending Act, it often seems that no detail is too insignificant to matter; we have called TILA hyper-technical in the past; and it will continue to be found as hyper-technical for perhaps years to come.
The case in question dealt with a judgment against a mortgage lender. The lawsuit was brought more than two years after the closing of the loan and the claim in the lawsuit was an alleged disclosure violation. It appears that the borrower signed and retained one copy of the Notice of Right to Cancel closing document which stated he had only three days after closing to rescind the mortgage. The borrower argued that he had only received one copy of the Notice, whereas Truth-In-Lending required that he receive two copies of the Notice.
The Court argued that, although the difference between one and two copies may seem to be an empty formality, there is no room for any kind of substantial compliance. Two copies means two copies, not one. The borrower was allowed the opportunity to rescind the mortgage loan. Readers of this newsletter should be reminded of how complex and how hyper-technical the Truth-In-Lending Act is and continues to be.
Medical Leave Due To Pregnancy
What if your credit union is not subject to the federal Family and Medical Leave Act (FMLA)? How should you handle requests for time off for maternity leave?
The short answer is that an employee who is out on medical leave due to pregnancy must be treated just like any other employee who is on medical leave due to any temporarily disabling medical condition. In general, an employer must offer the same benefits to employees temporarily disabled by pregnancy as to employees who are temporarily disabled by any other medical condition. So when considering requests for medical leave due to pregnancy, you must consistently apply the same policies that you would follow for any request for medical leave due to any temporary disability. Maternity leave should be coordinated with the employers paid and unpaid leave policies just like any medical leave for any temporary medical condition.
This same principle — treating all employees on medical leave for temporary medical conditions, including pregnancy consistently — applies to other benefits which may be provided while on leave. This may include provision of health care coverage; sick leave, vacation and PTO accruals; pay increases; etc. Job reinstatement and/or consideration for vacant positions should be handled in the same consistent manner.
Employers may ask employees if they intend to return to work following medical leave due to pregnancy, as long as all employees going out on medical leave for any reason are asked the same question. The employees answer should be documented. If an employee affirmatively acknowledges that she will not be returning from medical leave, written confirmation can be requested and employment may be considered to end through resignation when the employee departs for medical leave.
“Maternity leave” should also be coordinated with your short term disability (STD) insurance policy. Depending on how your credit unions STD plan is structured, you may be able to require employees to re-pay STD benefits if they do not return to work following STD leave for reasons other than ongoing disability. This policy would need to apply to all employees going on STD leave for any medical reason, not just the employees going on leave due to pregnancy.
If your credit union maintains group health care coverage for employees who are out on temporary medical leave, you can also consider a policy which requires employees to reimburse the credit union for premiums in the event the employee does not return to work following leave for reasons other than ongoing disability.
Two caveats: (1) Even if your credit union is not subject to the federal FMLA, you must consider whether a state FMLA or similar law applies. At least ten states and the District of Columbia currently have such laws in effect. These state laws may require covered employers to provide protected leave and reinstatement rights, as well as provide certain notices, to eligible employees. (2) Consider avoiding the term maternity leave, and use the more appropriate designation of medical leave. If your credit union is providing maternity leaves which are longer than leaves for temporary medical purposes, you may be opening the door to a paternity leave requirement as well.
Questions about FMLA and other employment related topics will be addressed at K&Cs 28th Annual Employment Law Update on July 19th at the Hampton Roads Convention Center. Mention this newsletter when you register and receive a 10% discount off of the registration fee. See below for further seminar details.
Etc., Etc., Etc.
- The Kaufman & Canoles webinar entitled Executive Compensation Issues for Credit Unions was recently held with featured presenters Shad Fagerland and Andy Keeney. The webinar can be viewed by clicking here.
- When it comes to facilities issues, the devil is in the details. A checklist prepared by Terry Murphy is ideal for credit unions use. The checklist can be viewed by clicking here.
- Having difficulty understanding the concept of trusts and how they impact or could impact a credit union? A recent article by Vonda Chappell entitled Trusts 101 can be viewed by clicking here.
- If your credit union grants mortgage loans in several states, you may benefit from the American College of Mortgage Attorneys Mortgage Law Summary which provides detailed analysis and commentary on the mortgage laws and mortgage requirements for each state. To order a copy of the Mortgage Law Summary, click here.
28th Annual Employment Law Update – Putting the Pieces Together – July 19th
Knowing that companies are dealing with many pieces of the employment law puzzle, K&C is pleased to announce a program designed to help employers solve the employment law puzzle. The final showing of the 28th Annual Employment Law Update Putting the Pieces Together will be held at the Hampton Roads Convention Center on Thursday, July 19th.
The K&C Employment Law Team will present a variety of educational workshops and will feature several representatives from a number of government agencies, as well as an intriguing lunchtime presentation by James Shoemaker, a lawyer who specializes in suing employers. Attendees will also have a chance to view an educational and entertaining mock filing of an EEOC charge by a problem employee against his former employer, as well as attend a number of timely topics including: What Employers Should Know About Social Media; Avoiding Discrimination Claims; Handling Unemployment Claims; Current Wage-Hour Issues; Safe Interviewing/Hiring Practices; and more.
The 28th Annual Employment Law Update will provide employers with valuable tips to piece together their employment law puzzles and reduce potential liability. For more information, click here or contact Julia Rhody at (757) 624.3232. This program has been approved for 6 credit hours toward PHR and SPHR recertification through the Human Resource Certification Institute (HRCI). For more information about certification or recertification, please visit the HRCI homepage at www.hrci.org.
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 2020.