Written by Pamela Yu, Special Counsel for Compliance and Research
We all know that credit union compliance officers are some of the hardest-working people on the planet. With the myriad complex regulatory requirements that compliance officers have to contend with on a daily basis, it's no wonder that compliance officers are highly stressed. In fact, past surveys have found that 58 percent of compliance officers are up at night with job-related worries, and 60 percent have considered quitting because of job stress. Does this resonate with you?
Keeping up with immensely difficult and complicated regulatory requirements is no small feat. And sometimes, with everything going on, it's easy to get confused about even the most fundamental credit union requirements, like membership and par value. NAFCU's Compliance Team regularly fields these types of questions from our members so today let's get back to basics, and review this threshold requirement for credit union service.
Membership in a federal credit union requires an approved membership application and payment and maintenance of at least one par value share (as well as any applicable entrance fee). The Federal Credit Union (FCU) Act requires that federal credit union members "shall each subscribe to at least one share of its stock and pay the initial installment thereon and a uniform entrance fee if required by the board of directors." See, 12 U.S.C. §1759(a).
The par value of the required member share is established by each credit union in its bylaws. Article III, section 1 of the FCU Bylaws allows credit unions to set the par value of shares:
Par value. The par value of each share will be $___. Subscriptions to shares are payable at the time of subscription, or in installments of at least $___ per month.
There is no regulatory minimum or maximum amount for credit union shares and par values are often nominal—but sometimes not. Oftentimes, a credit union wants to increase its membership but it is concerned that the cost of the par value share may discourage new members. Can a credit union advance payment of the par value to potential members?
A credit union may not advance funds or extend a loan to a potential member to fund the initial membership par value share because, until an individual becomes a member of the credit union, the credit union has no authority to extend credit to that individual. See, NCUA Legal Opinion 97-0123. Federal credit unions may only lend to members. An advance of the initial share requirement would, in effect, be an impermissible extension of credit to a nonmember.
However, NCUA has issued several legal opinions indicating that, to promote membership, a credit union may pay the initial share from its own funds on behalf of a potential member to begin their credit union membership. See, NCUA Legal Opinions 97-0123 and 02-0250. Keep in mind that credit unions should be careful that any membership promotion to pay members’ initial share does not have a disparate impact in violation of anti-discrimination laws.
Another common scenario relates to imposing fees on inactive accounts. Can a credit union assess fees against a member's par value? Would depleting that par value cause the individual to lose their membership?
Credit unions are permitted to charge dormant or inactive account fees on member share accounts. However, if a credit union charges account fees and those fees have caused a member’s share account to fall below the par value amount, the credit union can terminate the account only if the member has not increased the balance to par value within a time period specified in the credit union's bylaws. See, NCUA Legal Opinion 08-1030. Article III, section 3 of the FCU Bylaws applies to a member account that falls below par involuntarily through the credit union's assessment of fees, whether it remains positive, reaches zero, or becomes negative. See, NCUA Legal Opinion 92-0806.
Article III, section 3 provides for the credit union board to set time periods for payment and maintenance of the membership share:
Time periods for payment and maintenance of membership share. A member who fails to complete payment of one share within ___ of admission to membership, or within ___ from the increase in the par value of shares, or a member who reduces the share balance below the par value of one share and does not increase the balance to at least the par value of one share within ___ of the reduction will be terminated from membership.
Credit unions should check their bylaws to determine exactly how long a member has to increase the balance in their account to at least par value to avoid termination from membership if the imposition of fees causes the balance to fall below par value. Further, while notification to a member is not strictly required each time a share balance is reduced below par value (See, NCUA Legal Opinion 92-0806), NCUA suggests that credit unions notify their members when their accounts are below par so that they may rectify the situation before losing their membership. At a minimum, credit unions should ensure members are aware of any policy to close an account when it falls below par value because of fees or other charges. This can be done through the account disclosures. See, NCUA Legal Opinion 93-1216.
In addition, NCUA’s longstanding position is that when accounts are involuntarily reduced to zero through the assessment of fees, members must be allowed a reasonable opportunity to bring their accounts back to par value. See, NCUA Legal Opinions 01-0255. The specific time period for restoring par value is up to credit union's reasonable discretion but the time period cannot be set at zero in the bylaws. See, NCUA Legal Opinion 08-1030.
Okay, but what if a member's share account is below par value but the member has an outstanding loan with the credit union? Since we can't lend to nonmembers, can the credit union still maintain the loan?
With respect to any outstanding loans of a member whose account is below par value, or whose membership has been terminated due to a failure to increase their account balance, the credit union may maintain the loan so the member (or former member) may continue to make payments on the loan.
In fact, NCUA has indicated that a credit union does not have the authority to accelerate the loan or demand full repayment in this circumstance:
"(a)n FCU has no right to force an individual to pay off a loan simply because his membership in the credit union has been terminated. Repayment of a loan is governed by the repayment terms set out in the contract, and an FCU may not unilaterally amend that contract. Neither the Act nor the Regulations provides any basis for accelerating a loan solely on the basis of termination of membership."
See, NCUA Legal Opinion 95-0339.