NCUA LOL on Limitation of Services; Model Privacy Notice Update

Yesterday, NCUA released a legal opinion letter, 08-0431, regarding suspending member services.  You can access the legal opinion letter here.    I think this is a fairly important piece of guidance.

Many credit unions have policies through which they limit services to members who cause them a loss.  Or perhaps to abusive members.  I won't go into the nuts and bolts of creating such a policy here.  Recently, I've heard of credit unions that have thought about using such a policy to limit services to members whom the credit union suspects are laundering money, breaking laws, etc.   This letter seems to disallow limiting services based on a hunch.

You noted we have not directly addressed all the circumstances you raised. Generally, we would have no objection to suspending certain services to members where there is a logical relationship between the objectionable conduct and the services to be suspended, for example, 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. We caution that mere suspicion regarding a member’s activities would not constitute a rational basis for suspending member services without more direct evidence of the member causing actual harm or loss to the FCU.  Before any suspension of services policy can be enforced, FCUs need to ensure that the policy is in writing and provided to all members so that members are aware of it. (Emphasis added.)

Here's an example.  A member who makes $40,000 a year as a teacher has funneled $1 million in cash through her account in one year.  Cash deposits come in, and cash withdrawals are made in a foreign country, almost immediately.  This reeks of money laundering.  But is it enough to limit services via a suspension of services policy?  We called NCUA, and an employee informally answered: no.  Even though it appears suspicious, their view is that the credit union could not use a limitation of services policy to even close a share draft account or ATM card.

Now, one might be able to crack this nut another way.  For example, during account opening, a credit union could hammer away at due diligence to ask members how they planned to use the account.  If the member indicated that they planned to use the account for cash-intensive, cross-boarder transactions, the credit union might be in a position to decide against opening the account.  Conversely, if a member indicates that they only want limited cash transactions with very, very limited international transactions, the credit union might be in a position to claim that the account is not being used for a purpose outlined by the member in transactions similar to the hypothetical.  A cleverly constructed member agreement could give the credit union the right to terminate services on a contractual basis.  (Note, this is me brainstorming after two weeks in the wild.  I'm not saying that is gold, Jerry, gold.  Just that it is something to look into.) 

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The word on the street is that the model privacy notice might be out by the end of 2008.

Comments

[Peter]

So, based on the informal opinion at NCUA, no NCUA examiner will EVER question an FCU for not shutting down an account where the Bank Secrecy Officer has a hunch money laundering is occuring but no proof is actually obtained until the FBI comes kncking on the FCU's door for forfeiture of the funds int he acocunt and the BSA Officer is escorted from the building in handcuffs for not compying with BSA? This legal opinion seems a wee bit overbroad in not allowing FCU's who are required by law to know their members from not reasonably racting to their knowledge. Of course, my opinion and $4.00 will get you coffee at Starbucks!

[Anthony Demangone]

Peter: I hear you. This certainly boxes credit unions in who have members doing naughty things with their accounts. Absent some actual evidence, our hands are tied if we wanted to use "suspension of services" policies. BTW, my Starbucks order is usually under $2! So, your opinion and $4 is worth far more than one coffee to me! :)

[Rob Rutkowski]

Excellent post, Anthony. Your example would require a SAR filing and then an ongoing filing every 90 days until it stopped happening. The CU would want to stop the activity quickly, however, because if the money were being used to fund terrorist activities, it would be game over for the CU.

[John Guide]

Can one become a member of a credit union by only opening a checking account without a regular share account?

[Anthony Demangone]

Hypothetically, yes. NCUA does not mandate what type of account a member must hold. However, here's the rub. Most credit unions hold the one share at par value. And technically, holds on these accounts are governed by Reg CC. So, how does one place a permanent hold on a checking account? I'm not sure. But I'm open to suggestions.