Credit Union Legal Update – Winter 2009
Loan Workouts, Loan Modifications and Loan Extensions
At a time when federally-insured credit unions would prefer to be making loans, many are spending a considerable amount of time addressing requests for loan modifications or extensions. We are not talking about refinancing, but managing existing loan obligations and requirements. If a real estate loan is involved, credit unions should consider consulting with their legal counsel and also their title insurance company.
The NCUA Examiners Guide on Extensions and Refinancing provides as follows:
‘Examiners may review extension and refinancing policies and procedures for reasonableness. At times, credit unions can effectively use extension agreements or refinancing of delinquent loans as collection tools; however, excessive extension agreements or refinancing can mask delinquency. Credit unions should use extension agreements or refinancing of delinquent loans only to help borrowers overcome temporary difficulties, and after the borrower demonstrates renewed willingness and ability to repay the loan. Generally, credit unions grant extension agreements to delinquent borrowers who have demonstrated their commitment to repay their obligations by making substantial payments for at least three months prior to approval.
The collection department can prepare extension agreements; however, a loan officer or credit committee must approve the transaction to assure segregation of duties and avoid a conflict of interest. Credit unions should refinance delinquent loans only after the borrower has demonstrated a consistent effort and ability to repay. Refinancing of delinquent borrowers that do not make consistent payments could warn examiners of hidden delinquency. As a general rule, credit unions should not extend or refinance a loan more than once within a twelve-month period, or two times within a five-year period. If the credit union has a history of frequently extending or refinancing loans, the examiner should carefully review the underlying reasons.’
Loan extension policies should address the qualifications and procedures for granting extension agreements, including:
- Documentation of the reasons for granting extension;
- Identification of the persons with the authority to approve extensions;
- Require that the member demonstrate a reasonable ability to meet his or her payment obligation following the extension;
- Limitations on the frequency of extension agreements.
Loan Participations – Thank You, NCUA
For a number of years, federal credit unions that have been entering into loan participations have had to rely solely on the regulations. In a recent letter to credit unions (08-CU-26), NCUA provided some detailed guidance and direction to any federally-insured credit union that is considering loan participations. Properly managed loan participation programs have been found to be beneficial to both selling and buying credit unions. Loan participation sales may provide selling credit unions with the mechanism to manage interest rates, liquidity and credit risks, as well as an enhanced ability to serve members. Buying credit unions may benefit from balance sheet diversification and increased revenue. Loan participations are a nice way to manage a number of risks, however credit unions must use effective due diligence efforts to identify, measure, control, and monitor the risks of loan participations. Risk assessment and strategic planning is still key.
Some areas of risk assessment to be reviewed during due diligence are: credit risks, interest rate risks, liquidity risks, transaction risks, compliance risks, strategic risks and repudiation risks. Previously, this has been satisfactorily addressed through comprehensive due diligence by both the buying and the selling credit unions. The transaction is then scrutinized and carefully undertaken and documented and a contract is required to be supported by a legal opinion. Nothing has changed. However, this letter from NCUA and its accompanying questionnaire will provide great insight. If your credit union does loan participations or may do them in the future, this is an absolute ‘must read.’ This letter to credit unions is, more or less, what NCUA provides to its examiners. The attachment is a supervisory letter that NCUA distributed to its field staff. If your credit union uses loan participations, your examiner will probably read this before they examine your program. For that reason, you should know what is contained in the letter.
This guidance is just the latest example of how NCUA wants you to incorporate risk management into your day-to-day operations. The trend continues. Risk management is critical. A copy of this NCUA letter can be downloaded by clicking here.
Here Comes GINA!
No, GINA is not an early-season hurricane (as might be expected in Hampton Roads). GINA is the Genetic Information Nondiscrimination Act of 2008, and employers should be prepared to comply with this new addition to the list of federal anti-discrimination requirements soon. GINA adds a new ‘protected category’ to the well-known Title VII categories of race, color, sex, and the like. Beginning November 21, 2009, GINA makes it unlawful employment practice to fire, refuse to hire, or discriminate in the terms of employment against any employee ‘because of genetic information with respect to the employee.’ Employees who feel they have been discriminated against, or harassed, based on their ‘genetic information’ will have the same options – including filing administrative charges of discrimination and federal lawsuits – as they now have for perceived discrimination or harassment based, for example, on sex.
Commentary on GINA has described it as everything from a ‘solution in search of a problem’ to ‘a victory for every single one of us.’ The truth probably lies somewhere in the middle. The key to this new law is the definition of the protected class and the term ‘genetic information.’ Genetic information includes an employee’s genetic tests and the genetic tests of the employee’s family members. Realistically, this law should prompt little change in the way local employers do business because most companies do not typically require genetic testing of their employees. Also, Virginia is one of more than thirty states which already have state-level protections against discrimination based on genetic information. But remember that any documents that might possibly reflect genetic testing of an employee or employee’s family that are legitimately in the employer’s possession should be segregated and kept in a separate, confidential file – not in the personnel file! Treat any documents of that type in the same careful way you would documents relating to a ‘disability’ to be accommodated under the Americans with Disabilities Act or a serious medical condition under the Family and Medical Leave Act.
New FMLA Regulations Now in Effect
On November 17, 2008, the Department of Labor released new Family and Medical Leave Act (FMLA) regulations. This is the first major overhaul of FMLA – which allows qualified employees to take up to 12 weeks of medical leave annually – in more than a decade. These regulations went into effect on January 16, 2009 and may have an impact on employers of the estimated 7 million employees who take FMLA leave annually. Highlights from the new regulations include:
- Employers now have five days (up from two) to give notice of FMLA leave rights;
- There are now two different certification forms, depending on whether the employee or a family member has a ‘serious health condition’;
- Employees must follow company policies with regard to providing FMLA notice, such as giving notice in accordance with normal attendance rules, absent unusual circumstances;
- Only certain individuals can contact an employee’s health care providers for medical certification. For example; health care providers, leave administrators, HR professionals, and management officials, not direct supervisors;
- Vacation and sick leave may be treated the same for purposes of using accrued paid time off as a substitute for unpaid FMLA leave;
- Light-duty assignments do not count toward FMLA leave;
- Employees and their employers may settle FMLA claims without prior government or court approval;
- Employers may be liable if a failure to provide FMLA notice causes actual harm to an employee.
These regulations also implement new family military leave entitlements. A ‘spouse, son, daughter, parent or next of kin’ of covered service members may now take up to 26 work weeks off to care for a service member who has a serious illness or injury incurred in the line of duty. The regulations also define circumstances when a family member of members of the National Guard or Reservists called to duty may take all or part of his/her regular allotment of 12 weeks of FMLA leave due to a ‘qualifying exigency.’
Grave Robbery and Identity Theft
In a recent issue of Credit Union Legal Update, we addressed identity theft and various notification requirements. Regrettably, identity theft has evolved into a situation where one’s identity is being stolen even after a death. At death, one’s name and reputation need to be protected. Here are a few suggestions for consideration:
- Do not include details such as day or month of birth or addresses in obituaries. Only use the year.
- Mail copies of the death certificate to all three credit reporting bureaus and all credit card issuers requesting concelling account rights after a person’s death.
- Contact your State Department of Motor Vehicles to cancel any driver’s license and prevent duplicates from being issued.
- A few weeks after taking these measures, run a credit report on the deceased to ensure that there is no suspicious activity.
Refusal or Suspension of Credit Union Services
In a recent Office of General Counsel Opinion, an inquiry was made about the right of a federal credit union to suspend services if a member has caused a loss to the credit union. The inquiry also addressed whether or not suspension of services could be expanded to include members who threaten or behave inappropriately towards staff or other members. What about members who have presented counterfeit items, kite checks or engaged in suspicious transactions?
NCUA answered in the affirmative to all such questions. A federal credit union may have a policy suspending or limiting services to members in various circumstances if there is a rational basis for the policy. Members need to receive advance notice of the policy. Service can be suspended or limited but not eliminated. A credit union cannot terminate a member’s right to vote in annual elections or to maintain a share account without complying with the Act’s requirements for expulsion.
The Federal Credit Union Act grants all members two basic rights: (1) the right to maintain a share account, and (2) the right to vote at annual meetings. These rights cannot be suspended or terminated without some extraordinary, costly, and extensive procedures that are provided for in the Act.
As a general rule, NCUA would have no objection to a credit union that adopts a policy (and provides notice of that policy to its members) where there is suspension of certain services, if there is a logical relationship between the objectionable conduct and the services to be suspended. A good example would be denying access to credit union premises if a member has been abusive or threatening towards staff. Another example would be denying services involving an extension of credit where a member has caused a loss or repeatedly presented counterfeit items for cash or deposit.
As noted above, NCUA encouraged credit unions to consult with legal counsel since the Equal Credit Opportunity Act and Regulation B might apply. A credit union policy could be found to be discriminatory if it has a negative impact on a protected class of persons even though there is no intent to discriminate.
In summary, the credit union may consider adopting a refusal of services policy which would affirmatively provide that the credit union has the right to suspend or refuse services to members for certain reasons. Some credit unions elect to list reasons, such as:
- The member has caused a loss to the credit union.
- The member has caused a disturbance in the credit union..
- The member has threatened an employee, member or vendor of the credit union.
- The member has caused physical harm to an employee, member or vendor of the credit union.
The suspension or refusal of services could take many forms. The following is a list of a few examples:
- A member may only be allowed to conduct business by mail or by phone.
- A member may be limited as to what services they can utilize.
- A member may be allowed to maintain a share account.
Again, the policy needs to be provided to members and legal counsel should be consulted.
Removal of a Board Member
Some federal credit union Boards of Directors promote or encourage a philosophy where all actions should be adopted by unanimous vote. This issue was recently considered by NCUA. Apparently, the majority of a federal credit union’s Board of Directors sought to remove a vocal dissenter from their Board of Directors. NCUA immediately ruled that the removal of a sitting director requires a membership vote at a special meeting. A director’s seat may be declared vacant by the Board, but only if a director fails to attend regular Board meetings or otherwise fails to perform his or her duties as a director.
Apparently, a director repeatedly was voting in the minority or abstaining or disagreeing or opposing the views of other Board members. That Board was dissatisfied with the action and sought to remove one of their own. NCUA chastised the credit union at issue and encouraged a full, healthy and robust debate among federal credit union Boards of Directors.
Under the Federal Credit Union Standard Form Bylaws, a director may only be removed if the director fails to attend regular meetings of the Board (for three consecutive months or four meetings within a calendar year) or otherwise fails to perform any duties as a director. Absent an affirmative membership vote at a special meeting, a director cannot be removed from membership on the Board of Directors. NCUA concluded that, given the nature of the allegations that were presented, the Board of Directors in question did not have permissible grounds for the Board to declare a Board seat vacant.
FTC Issues Report on SSNs and Identity Theft
The Federal Trade Commission has issued a report recommending 5 measures to help protect Social Security numbers (SSNs) from being used for identity theft. The FTC’s recommendations are intended to address both the supply and demand aspects of the issue by proposing actions that would make SSNs less available to identity thieves and to make it more difficult for thieves to misuse the SSNs they obtain.
To achieve these goals, the FTC recommended 5 actions:
- Improve consumer authentication;
- Restrict the public display and the transmission of SSNs;
- Establish national standards for data protection and breach notification;
- Conduct outreach to businesses and consumers; and
- Promote coordination and information sharing on use of SSNs.
‘Security in Numbers: SSNs and ID Theft’ is available on the FTC website by clicking here.
Website Considerations and Mergers
For those federal credit unions that have considered a merger, most seem to acknowledge that the requirements established by NCUA make it an arduous task. Strict compliance with rules and regulations is required. Perhaps even more importantly, field of membership issues must be properly addressed and satisfied and sometimes become the obstacle. Recently, NCUA was consulted by a credit union that was seeking to claim a website as a ‘service facility’ for the purposes of meeting NCUA’s chartering and field of membership requirements. NCUA General Counsel Robert Fenner concluded that multiple common bond credit unions adding a new group to their field of membership must be ‘within reasonable proximity to the location of the group.’ To meet this standard, a credit union service facility would be acceptable if it is in reasonable proximity to the group. It was determined that an internet website is not a service facility.
The NCUA Chartering Manual defines a service facility as a place where shares are accepted for members’ accounts, loan applications are accepted or loans are disbursed. This may include: a credit union branch; a mobile branch; an office operated on a regularly-scheduled weekly basis; an automatic teller machine; a credit-union-owned electronic facility that meets the stated minimum requirements; and some share branch or share network facilities. An internet website was deemed as not meeting the definition of a service facility since the credit union’s website lacked a physical presence.
Working With Residential Mortgage Borrowers
In addition to the suggestions of the previous article dealing with loan workouts, loan modifications and loan extensions, all federally-insured credit unions are encouraged to review a recent NCUA letter that was addressed to all federally-insured credit unions. NCUA sought to address some of the issues that federally-insured credit unions are now confronting when they have had to foreclose on properties or repossess assets. NCUA identifies this property as ‘FRA,’ which means foreclosed and repossessed assets. They acknowledge the current financial market, but as of the time of publication of the letter, NCUA did not grant much flexibility. Philosophically, NCUA encouraged credit unions to work ‘constructively’ with residential mortgage borrowers who may be unable to meet their contractual payment obligations. They urged credit unions to work with borrowers whenever possible. However, NCUA concluded that FRA should only be held temporarily and not permanently as income-producing assets. Again, at the time of publication, NCUA maintained that FRA should be actively marketed for sale as evidenced by the fact that the credit union has committed to a plan of sale, is seeking a buyer, and expects to collect on the sale within 12 months.
Employers Forced to Lay Off Employees Face Legal Risks
As the economy falters, many employees are forced to lay off employees and/or restructure their workforces. This has led to an increase in legal claims filed on behalf of employees who feel they were discriminated against, or otherwise wrongfully discharged.
While generally only employers with over 100 employees need to worry about the 60-day advance notice required by the Worker Adjustment and Retraining Notification (WARN) Act, most employers face other risks, such as discrimination or wrongful discharge claims. For that reason, it’s recommended that employers rely on well-documented business reasons in choosing employees to be laid off. While severance packages are not required, they can be used to obtain releases from employees, and thus avoid any legal risks. Employers should also be well aware of any obligations to pay employees accrued leave, and they should consistently apply written policies regarding obligations to terminated employees.
The Rules of Vendor Management*
Our Winter 2008 Credit Union Legal Update included an extensive article with warnings regarding third-party vendor relationships. The article included a lengthy summary of due diligence issues and contract issues. Third-party vendor relationships, due diligence and a comprehensive review and analysis of all third-party vendor contracts is an ongoing assignment for credit unions and their counsel.
Credit unions need to work with capable, knowledgeable third parties. Knowing your vendor is key. Knowing the vendor your vendors hire is even more important. Credit union members trust the selections made by credit unions. Do not assume anything about a credit union vendor. A credit union will probably need to think twice if:
- The information you requested is not timely provided.
- The information is incomplete.
- The information is outdated.
- The information or answers are vague
- There is no single point of contact for information security.
- The incident management history shows no remediation.
- The vendor has no disaster recovery plan.
- The vendor outsources the processing of data.
- The information provided applies to the parent company – it is not really specific to the service the company would provide to the credit union.
- Field personnel do not have encrypted devices.
- Information gathered is not secured.
*This article is based in part on a January 22, 2009 CUES article by Lisa Hochgraf and is used with permission.
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.