NAFCU Compliance Blog

Mind if I ask a favor, my credit-worthy friend? / New IRS Guidance

Written by Reginald Watson, Regulatory Compliance Counsel

Greetings! A little while ago, Stephanie blogged about the perils of being a non-member and the limited rights of nonmember joint-account owners. But do these rights extend to nonmembers in the case of co-applicants on a loan? In this day and age of hyper-connectivity and transient travel, credit unions can stand to lose some business if potential borrowers were not permitted to solicit help from a slightly more credit-worthy friend with the unfortunate reality of falling outside of the credit union's field of membership. This blogpost will address the permissible roles nonmembers can play in the loan application process. 

The Federal Credit Union Act provides credit unions with the power to make loans to its members, to other credit unions, and to other credit union organizations. Similarly, the FCU Bylaws require that federal credit unions may only extend loans to members. In response to questions about where exactly nonmembers fit in, the NCUA states in Legal Opinion Letter 2000-0605 that "nonmembers may participate in loans as long as their involvement does not distort the direct lending relationship between the FCU and the member." The NCUA General Counsel has also previously discussed similar issues in legal opinion letters 95-0616 and 94-0424, presenting a laundry list of synonymous sounding terms (such as joint-applicant, co-borrower, co-maker, co-signer, endorser, guarantor, etc.) that can become a bit head-scratching to navigate. The NCUA Examiner's Guide may help sort things out:

"The terms co-maker, co-borrower, co-signer, guarantor, and joint applicant sometimes create a degree of confusion. In general, these terms refer to one of two possible parties, either a co-maker or a co-signer.

A co-maker shares equal responsibility with the borrower for payment of the loan and receives an equal benefit in the loan proceeds, or access to future advances in an open-end loan. Regulation B (202.7(d)(1)) identifies a co-maker as a joint applicant and the resulting loan as joint credit.

A co-signer takes on liability for the obligation of another person without receiving goods, services, or money in return or, in an open-end credit obligation, without receiving the contractual right to obtain extensions of credit under the obligation. Credit unions request a cosigner’s signature as a condition for granting a member credit or as a condition for forbearance on collection of a member’s obligation in default.

(…)

The co-maker shares in the loan proceeds and bears joint liability for repayment. Thus, a credit union cannot make a loan to a nonmember co-maker. However, a credit union may permit a nonmember to sign a loan, provided the nonmember does so in the capacity of a guarantor (cosigner), rather than a loan recipient (co-maker.)"

NCUA Examiner's Guide, Chp. 10 at page 39.

So there you have it. It appears that co-makers are required to be members, whereas nonmember friends can be co-signers. After all, that's what friends are for!

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IRS Issues Guidance on Mortgage Insurance Premiums and Home Equity Loan Deductions

Despite fears to the contrary, the deductions for interest paid on home equity loans and for private mortgage insurance were mostly preserved in the recent Tax Cuts and Jobs Act (TCJA) and corresponding tax extenders bill. The IRS issued new guidance earlier this week on the deduction for home equity loans as well as the deduction for mortgage insurance premiums. The Instructions for Form 1098 and General Instructions provide guidance on amending Form 1098. For additional information, we recently blogged about some of the major components of TCJA that affect credit union operations. Until next time compliance friends!

The Circle of Life: Federal Considerations for Member Decedents

Written by: André B. Cotten, Regulatory Compliance Counsel

Hello Compliance Friends! Over the holidays, I had a chance to relax, travel and check out some old and new films. One of my favorite movies will forever be Disney's The Lion King. The death of Mufasa will forever pull at my six-year old heart strings.  Today's blog will talk about what to do when Mufasa Member finds himself in a wildebeest stampede and the circle of life suddenly closes.

As compliance practitioners, I am sure that you are aware a lot of these issues would need to be discussed with your local counsel because they directly involve state law issues. However, I have highlighted some NCUA specific and federal law issues that may serve as helpful reminders. I have segmented this post according to subject areas for your convenience.

Accounts

The FCU Model Bylaws contain the following provision with regard to keeping a deceased member’s account open. You may want to review your credit union’s bylaws for a similar provision.

“(d) The share account of a deceased member (other than one held in joint tenancy with another member) may be continued until the close of the dividend period in which the administration of the deceased's estate is completed.” 12 CFR 701, App. A.

(emphasis added)

The bylaws do not address closing an account and re-opening a new one. On the other hand, an account held in joint tenancy can remain open. If it is determined that the joint tenant is not a member in his/her own right but within the credit union's field of membership, then the person would need to become a member so that the credit union would not impermissibly be offering services to a nonmember.Note, insurance may end six months after death of a member unless the account is restructured

Moreover, after a member dies, the credit union still has the responsibility to protect member funds and information. To begin, under many states' laws, absent a named beneficiary, the funds of the account are a part of the deceased member’s estate. Therefore, a credit union may need to avoid releasing the funds until the qualified representative of the estate has been named by a court or according to the applicable state’s probate laws. 

Account information is considered non-public personal information and therefore cannot be disclosed without providing an opt-out notice, unless the disclosure falls under one of the exceptions. Note, non-public personal information may be disclosed to a person holding a legal or beneficial interest relating to the member, and to persons acting in a fiduciary or representative capacity on behalf of the member.

Lastly, before closing a member account, the credit union may want to proceed with caution. Depending on its respective policy, the credit union may want to flag on the account that the owner has died, and then allow a period of time for any surviving owners or the member's estate to take ownership of the matter. The documents needed to close an account will depend on state law, the account agreement and the credit union's internal policies and procedures.

Tax Issues

To begin, one concern from a federal perspective is that having continued tax reporting of a member's social security number after the person's death can cause tax complications. Although, this may not always be possible if Mufasa Member dies later in the tax year. IRS Publication 559 contains an overview of issues involving deceased persons, and while aimed at executors of estates, has some helpful information about Form 1099.

In addition, the credit union should note that a discharge of indebtedness under a settlement agreement between a credit union and a debtor or a debtor's estate is an "identifiable event" that triggers the obligation to file Form 1099-C.  The instructions for Form 1099-C may be accessed here.

Loans

With regard to credit, the credit union's options would be determined by state law, the loan agreement, and the specific situation. Often, if the decedent was the only borrower, the credit union could be looking at making a claim against the estate.  Even though someone may be making loan payments, unless they are contractually obligated to make those payments, the credit union may want to see if an estate has been established (or if there’s some other claim that should be made, for example, if the member had life and disability insurance under which a claim could be made).  Absent a will, state law will determine the disposition of the decedent’s assets to heirs, including vehicles and real property. Often, heirs have to decide if they want to keep an asset (and likely refinance the loan), or if they want to sell the asset to pay off the credit union’s loan, etc.

In regards to mortgage loans, a lot of mortgages include due-on-sale clauses which allow the lender to call the loan upon the death of the borrower; however, there are situations in which a due-on-sale clause cannot be exercised – for example, if the property is transferred under joint tenancy.

This is the section of NCUA’s rules and regulations that references due-on-sales clauses.  Note the general prohibition on exercising a due-on-sales clause where property is transferred on the death of a joint tenant or tenant in the entirety, or transferred to a spouse or children, as discussed in 12 CFR 701.21(g)(6). Overall, this is a fact specific analysis that the credit union may want to review with local counsel.

Special Issues

There is a rule that Social Security benefits are not paid for the month that Mufasa Member dies. Here is the Social Security Regulation:

Ҥ404.311 When does my entitlement to old-age benefits begin and end?

[…]

(b) We will find your entitlement to old-age benefits ends with the month before the month you die.”

This seems unfair and actually legislation has been introduced in the past on this topic but the way the rule is written, even if a member dies on the last day of a month, the member is not entitled to Social Security benefits for that entire month. Here is an excerpt from a Social Security guide:

“If the deceased was receiving Social Security benefits, you must return the benefit received for the month of death or any later months. For example, if the person dies in July, you must return the benefit paid in August. If benefits were paid by direct deposit, contact the bank or other financial institution. Request that any funds received for the month of death or later be returned to Social Security. If the benefits were paid by check, do not cash any checks received for the month in which the person dies or later. Return the checks to Social Security as soon as possible. However, eligible family members may be able to receive death benefits for the month in which the beneficiary died.”

There is guidance with regards to check reclamations specifically. The Social Security Program Operations Manual has a section on electronic funds transfer reclamations and a section on check reclamations.

The Department of Treasury’s Green Book  also addresses check reclamations more specifically including how to reply to a "Notice of Reclamation" and when there may be a right to protest.

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As I previously mentioned, when the circle of life closes on a member, there are numerous state law issues that are implicated, and a credit union will need to consult with local counsel to determine how best to draft and modify its policies. However, there are some NCUA and federal law issues that are implicated when a member dies, and credit unions will need to maintain policies that strike a balance between state law, federal regulations, and the business needs of the credit union.

Editor's Note: As helpful insight from a blog reader, I added information about NCUA's 6-month grace period for decedent accounts. I modified this post on Friday, January 19, 2018 to provide a more through legal analysis and to be a more complete resource for NAFCU's members.

"Friday Fun: Regulatory Requirements for Online Account Openings"

Written by: Andre' B. Cotten, Regulatory Compliance Counsel

Greetings, Compliance Friends! Opening accounts online is a major convenience for members. However, for compliance officers, the online account opening process is riddled with potential pitfalls. For example, when and how does the credit union provide the account opening disclosures. Today's blog is meant to be a high-level review of some of the relevant requirements credit unions may want to consider when establishing online account opening policies and procedures.

Bank Secrecy Act

From a BSA standpoint, opening accounts online can represent risks related to a credit union's Customer Identification Program (CIP) and Know Your Customer requirements. Generally, a credit union's CIP program is based on its own risk assessment and not prescriptive requirements. Although, from a CIP perspective, members opening accounts online is generally considered higher risk. From NAFCU's understanding, many financial institutions utilize complex vendor software in order to ensure the CIP requirements are met when individuals seek to open accounts online.

The FFIEC BSA/AML exam manual discusses "non documentary" methods of verifying identity that may also be helpful to the credit union. Note, the BSA requires that the credit union know the member's identity with reasonable certainty and have the member's name, address, date of birth and identification number so that guides what needs to be verified.

NCUA

However, a consumer must fall within the field of membership before they can be admitted as a member in the credit union. This determination will depend on the credit union's statement of its field of membership, the clause of the statement relied on by the potential member, and the credit union's policies and procedures.

Note, Article II, Section 2 of NCUA's FCU Bylaws requires a member to sign an application for membership. The credit union might verify this language in its own bylaws, and if it does appear, consider electronic signatures under the E-SIGN Act or whether it will require a member to come in and provide a wet signature for the signature card and to establish insurance under Part 745.

As an additional reference, NCUA Opinion Letter 2004-0543 discusses electronic signatures in the membership context.

E-SIGN

The E-Sign Act requires credit unions to receive the member's affirmative consent to receive electronic records. See, 15 U.S.C. § 7001(c). . As an industry standard, it seems many credit unions require members to comply with the E-SIGN consent and procedures when registered for online banking to give legal effect to the disclosures transmitted to the members  through the online banking platform.

For more information, NCUA issued a Risk Alert soon after the E-SIGN Act became effective in March 2001. Here is an additional link for your reference: Consumer Compliance Outlook 4Q Article on ESIGN .

Regulation E

The determination whether a credit union is required to provide additional disclosures when a member establishes an account online depends on what other types of products or services the member is requesting. For example, if the member requests a debit card to execute electronic fund transfers, then the credit union would need to comply with Regulation E.

Regulation E requires initial disclosures be provided "at the time a consumer contracts for an electronic fund transfer service or before the electronic fund transfer is made involving the consumer's account." Below are some Regulation E links of interest:

• Section 1005.4 contains general disclosure requirements and references providing disclosures electronically (E-SIGN)
• Section 1005.7 contains requirements for initial account disclosures
• Supplement I to Part 1005 contains commentary to both sections that clarify requirements
• Appendix A contains Model Forms for Regulation E – Model Form A-2 applies to initial account disclosures

Truth in Savings

NCUA's Truth in Savings Rule has a similar requirement that specifies that credit union must provide account opening disclosures before the account is opened or a service is provide din connection with the account. See, 12 C.F.R. § 707.4(a)(1)(ii).

Here are some Truth in Savings links of interest:

• Section 707.4 contains the requirements for delivery or initial account disclosures
• Section 707.3 describes how disclosures can be provided electronically (i.e., following E-SIGN) and the relationship to Regulation E
• Appendix C contains commentary to both sections that clarify requirements
• Appendix B contains Model Forms for TIS – Model Form B-1 applies to initial account disclosures

Privacy

Under the GLBA, Initial Privacy Notices and Opt-Out Notices can be provided electronically. The notieces can be delivered pursuant to the E-SIGN Act, or  in certain circumstances, the notices can be delivered when the consumer is conducting transactions electronically. Under section 1016.9(b)(1)(iii), it is considered valid delivery to post the privacy notice on a website and require the consumer to acknowledge receipt of the notice as a necessary step to obtaining a particular financial product or service.

Another privacy consideration for online banking is the Children’s Online Privacy Protection Act (COPPA). COPPA imposes certain requirements on operators of websites or online services directed to children. Credit unions are subject to COPPA if they operate a website or online service directed to children, or have actual knowledge that they are collecting or maintaining personal information from a child online. Making COPPA determinations generally requires an analysis of the specific facts and circumstances surrounding a credit union’s online activities against the requirements of COPPA. Thus, a credit union may want to work with local counsel to see if COPPA applies. The FTC’s website has an excellent overview of COPPA.

State Law

Lastly, there may be state law considerations. An online banking agreement establishes contractual obligations between the credit union and the member. The credit union may consider consulting with local counsel to develop a comprehensive agreement that includes, but is not limited to: balance and transaction information; password creation and maintenance; access authorization; and technical assistance.

Additional Resources

Below are a few resources on authentication, cybersecurity, and other issues related to online banking:

• NCUA Official Sign is required on a webpage where a credit union accepts deposits or opens accounts under section 740.4(a). Downloadable graphics of the sign are available here.
• Regulation CC requires the credit union to provide disclosures relating to funds availability “before opening a new account,” under section 229.17.
• NCUA Letter to Credit Unions 2011-CU-09 discusses Online Member Authentication Guidance
• FFIEC IT Booklets provides guidance on cybersecurity considerations.

Back to Basics: Membership and Par Value

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.

Par Value

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.

Freezing Share Accounts when a Member is Delinquent on a Loan

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings to all of you out there in regulatory compliance land. In light of the CFPB’s recent consent order with Navy Federal Credit Union, we received some questions asking under what circumstances federal credit unions are permitted to freeze or restrict access to a share account when a member is delinquent on a loan.

Article II, Section 4 of the Federal Credit Union Bylaws grant federal credit unions the authority to limit services or access to credit union facilities to a member who is disruptive to credit union operations. Here is the relevant section of the Bylaws:

ARTICLE II. QUALIFICATIONS FOR MEMBERSHIP

[…]

Section 4. Continuation of membership. Once a member becomes a member that person may remain a member until the person or organization chooses to withdraw or is expelled in accordance with the Act and Article XIV of these bylaws. A member who is disruptive to credit union operations may be subject to limitations on services and access to credit union facilities. A credit union that wishes to restrict services to members no longer within the field of membership should specify the restrictions in this section. (Emphasis added).

Through various Legal Opinion Letters, the Office of General Counsel has interpreted this authority to include limiting services to members that have caused a loss to the credit union. See, e.g., NCUA Legal Opinion Letter 96-0530 (June 10, 1996); NCUA Legal Opinion Letter 08-0431 (Aug. 12, 2008). In each case, the Office of General Counsel has required there to be some “logical relationship between the objectionable conduct and the services to be suspended” and that members receive notice of the policy.

However, the Office of General Counsel has cautioned that contract provisions in account and other member services agreements, as well as federal and state laws, may affect a federal credit union’s ability to implement a suspension of services policy. For example, in NCUA Legal Opinion Letter 08-0431, the Office of General Counsel notes that Regulation B may prohibit credit unions from implementing a suspension of services policy that has a disparate impact on minority borrowers and suggests that credit unions discuss this issue with legal counsel to determine the applicability of Regulation B and other requirements to the credit union’s suspension of services policy.

Another example of where federal law may prohibit a federal credit union from implementing a suspension of services policy involves consumer credit cards. Section 1026.12 of Regulation Z prohibits the use of offsets to satisfy a cardholder’s indebtedness to the credit union unless the member has granted a consensual security interest in the account to the credit union. Here is the relevant portion of the regulation:

(d) Offsets by card issuer prohibited.

(1) A card issuer may not take any action, either before or after termination of credit card privileges, to offset a cardholder's indebtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer.

(2) This paragraph does not alter or affect the right of a card issuer acting under state or Federal law to do any of the following with regard to funds of a cardholder held on deposit with the card issuer if the same procedure is constitutionally available to creditors generally: Obtain or enforce a consensual security interest in the funds; attach or otherwise levy upon the funds; or obtain or enforce a court order relating to the funds.

(3) This paragraph does not prohibit a plan, if authorized in writing by the cardholder, under which the card issuer may periodically deduct all or part of the cardholder's credit card debt from a deposit account held with the card issuer (subject to the limitations in §1026.13(d)(1)).

Commentary to this provision notes that holds on accounts or “freezing” accounts are considered to be the functional equivalent of an offset and are likewise prohibited unless the cardholder and the credit union have a consensual security agreement that permits the credit union to place a hold on the account. See, 12 C.F.R. pt. 1026, Supp. I, comment 12(d)(1)-1. Therefore, credit unions may wish to review credit card agreements with legal counsel to determine whether the necessary legal formalities have been observed to grant a security interest and permit the credit union to freeze an account.

So, practically speaking, what does this mean? Each situation is fact specific and credit unions seeking to adopt such a policy may wish to consult competent local counsel to review proposed programs and determine whether such programs comply with relevant legal requirements.   But there is the rub.  What are all the relevant legal requirements?  The CFPB cited its authority under UDAAP in the Navy consent order.  Whether the CFPB considers something to be unfair and deceptive is still not spelled out in regulation but rather is based on the bureau's own opinion as reflected in their enforcement orders. 

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The Adventures of a Non-Member: Joint-Owner Accounts

Written by Stephanie Lyon, Regulatory Compliance Counsel

Once upon a time, I traveled from Virginia to New York with the sole goal of recording a mortgage in the office of land records. I brought with me a cashier’s check, the mortgage deed, and an affidavit signed by the loan officer and member. When I arrived at the recording office, the clerk informed me that the check I had was insufficient to cover the recording taxes associated with the property. I started writing a personal check to cover the difference but the clerk looked at the check disapprovingly. To my dismay, the land recording office would not accept my out-of-state check or any cash. I quickly embarked on a scouting trip to the nearest credit union to purchase a cashier’s check before the office of land records closed. Unfortunately, that credit union would not provide me with a cashier’s check as I was not within its field of membership as required by section 701.30 of NCUA rules and regulations. I finally ended up driving to a U.S. postal office a town away to obtain the cashier’s check and successfully recorded the mortgage deed. While I did not make it on time to take my train, I was able to enjoy upstate New York hospitality. This story inspired me to blog about a frequently asked question regarding the extent of services non-members may receive from federal credit unions (FCUs).

The goal of FCUs is to “promote thrift among [their] members by affording them an opportunity to accumulate their savings and to create…a source of credit for provident or productive purposes.” 12 C.F.R. § 701, App. A, Art. I, § 2. Under certain circumstances, NCUA has permitted FCUs to provide services to nonmembers as an incidental power designed to promote credit union membership. These determinations are scattered across multiple legal opinion letters and in some portions of NCUA’s rules. We receive many questions about non-member joint accounts, so I thought I would address the issue coming off the long holiday weekend.

Federal credit unions often ask whether a non-member can be a joint owner on an account. The Federal Credit Union Act (FCU Act) provides that members may add non-member joint account owners under certain circumstances. While the FCU Act allows non-members to be joint owners on a member’s account, it prohibits non-members from voting or receiving other member benefits:

“Shares may be issued in joint tenancy with right of survivorship with any persons designated by the credit union member, but no joint tenant shall be permitted to vote, obtain loans, or hold office, unless he is within the field of membership and is a qualified member.” See, 12 U.S.C. § 1759.

Joint ownership implies the ability of one joint owner to withdraw all the funds in the account including the par value. See, e.g., Model U.C.C. § 4-403(a). Some credit unions have stumbled upon the issue when non-member join owners wish to withdraw all funds and close the account hence ending the accountholder’s membership in the credit union. In order to prevent this situation some credit unions have added language to account agreements that only allow the member joint owner to close the account. Credit unions may want to look at their specific bylaws and account agreements for similar provisions or consider working with counsel to add the necessary language to prevent non-member joint owners from closing the member’s account. Remember, even if the non-member joint owner withdraws all the funds from the account, the model bylaws have a section that allows the member a certain amount of time to bring the balance up to the par value to retain their member in good standing status. See, 12 C.F.R. § 701, App. A, Art. III § 3.

Aside from the joint-ownership, NCUA rules and regulations also allow FCUs to perform certain services for non-members that are within the field of membership of the credit union such as selling negotiable checks and offering check cashing services for a fee. See, 12 C.F.R. § 701.30(a)-(b). Additionally, FCUs that are designated as “low income credit unions” (LICUs), have the ability to accept shares from non-members such as other credit unions and public units. See, 12 U.S.C. § 1757(b). For more information on LICUs, see NCUA Letter to Credit Unions 10-CU-01.

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Here is a picture of the cozy B&B I called home for a night while attempting to record a mortgage in Saratoga, NY.

NCUA Issues Letter to Federal Credit Unions: How to Add an Association to its Field of Membership

Written by Victoria Daka, Regulatory Compliance Counsel

In early July, NCUA issued Letter to Federal Credit Unions 15-FCU-03, which provides guidance describing the modernized associational common bond rule. In April 2015, the Board finalized amendments to its Chartering and Field of Membership Manual that make substantial changes to how the agency will evaluate an application to add an association to a federal credit union’s (FCU) field of membership (FOM). While the preamble to the final rule provided some guidance on how to add an association to an FCU's FOM, many questions were left unanswered.

For background, the modernized rule encompasses three main changes to adding an association to an FCU's FOM. First, the final rule adds a preliminary threshold determination. Second, the final rule expands the “totality of the circumstances” test to eight factors. Third, final rule also provides twelve types of associations that automatically qualify for membership. 

With the benefit of the recently issued guidance, FCUs now have further guidance on adding an association to its FOM. While this Letter and accompanying enclosures clarify quite a few things, for purposes of this blog, I would like to highlight the following: 1) the “totality of the circumstances” test; and 2) the updated field of membership internet application (FOMIA) – including, the procedural aspects of the application.

Totality of the Circumstances Test

In the accompanying enclosure highlighting the Office of Consumer Protection’s (OCP) instruction to OCP staff, it is made clear that if five specific factors in the “totality of the circumstances” test are satisfied – factors 1, 2, 3, 4 and 8 – “the association is deemed to have met the totality of the circumstances test.” However, the guidance reiterates that no single factor is controlling, in the test.

The five most important factors are provided below:

"1. Whether the association provides opportunities for members to participate in  the furtherance of the goals of the association;

2.   Whether the association maintains a membership list;

3.   Whether the association sponsors other activities;

4.   Whether the association's membership eligibility requirements are  authoritative; and

8.   Separateness – whether the respective business transactions, accounts, and corporate records of the FCU and the group are not intermingled."

Updated Field of Membership Internet Application (FOMIA)

As of now, NCUA has updated its FOMIA to include the twelve categories of associations eligible for automatic approval. Additionally, this online system provides FCUs with an immediate electronic confirmation of approval. The decision is based off of the threshold determination and the Chartering and Field of Membership regulatory requirements.

FCUs seeking to add associations to its FOM that are not automatically qualifying can still receive an electronic immediate confirmation response determination of either: approved or pending, on the FOMIA. In these instances, however, the decision is based off of the threshold determination, totality of the circumstances test and the Chartering and Field of Membership regulatory requirements.

It is important to note, that while FCUs may be granted an immediate response, an FCU may only begin serving members of an approved group after “the board adopts the required resolution to expand its field of membership.” Moreover, upon receipt of completed applications, OCP will respond to FCUs no later than 15 days.  

However, “NCUA will continue to require each FCU to obtain and retain the following documentation when seeking to add groups to its field of membership through FOMIA:

   

1) A letter or equivalent documentation from the association indicating it wants to be

 

    added to the FCU’s field of membership; the number of primary potential members

 

    for the association; and the associational group’s proximity to the FCU or its nearest

 

    service facility; and

 

2) A copy of the most recent bylaws or other equivalent documentation (such as the

 

    charter or articles of incorporation) for the association the FCU wishes to add to its

 

    field of membership.”

 

NCUA’s Letter to Federal Credit Unions 15-fcu-03 and the accompanying enclosures are available here.

NAFCU's Regulatory Compliance School Just Got Better - Regulatory Update Day

Written by Steve Van Beek

We've heard you!  For the past couple of years, we've received the following feedback about NAFCU's Regulatory Compliance School (paraphrased, of course):

"School is great and provided a solid foundation for understanding the regulatory requirements credit unions face on a daily basis.  BUT, the rules are changing so fast that it would be great to receive updates on what has just changed and what is changing next."

With this in mind, we've created Regulatory Update Day at NAFCU's 2013 Regulatory Compliance School (March 18-23 in National Harbor, Maryland).  

Regulatory Update Day (Thursday, March 21st) will provide:

• A clear understanding of what changes NCUA has in store for 2013 – including their Exam Focus

• An overview of the scope and applicability of the CFPB’s seven new mortgage regulations*

• A detailed look at the CFPB’s Qualified Mortgage/Ability-to-Repay requirements*

• Answers to Frequently Asked Questions on the mortgage rules from NAFCU’s compliance team*

• Insight from credit union attorneys and practitioners on how best to set up your implementation strategy

You can find more information on Regulatory Update Day here.  The three sessions with the "*" are sessions that are also part of NAFCU's Mortgage Reform Webcast Series.

The other 4 days of Compliance School will remain the same as will the opportunity to take the NAFCU Certified Compliance Officer (NCCO) exams.  Good luck!  

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And, all attendees at NAFCU's 2013 Regulatory Compliance School will receive NAFCU's 2013 GPS (coming soon!) as well as NAFCU's Scope & Applicability Charts.

Remember:  You do not need to be a NAFCU member credit union to attend NAFCU's conferences or webcasts.  In fact, you don't even need to work at a credit union.  Each School usually features a handful of consultants, vendors and other credit union "peeps" who support credit unions - in one way or another - on a daily basis.      

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NCUA Board Meeting; ALLL Webinar; Term Limits?

Posted by Anthony Demangone

OK, this really is my last blog post!

Good morning, folks.  I hope everyone had a great weekend.  Das Twins, Mandy and I ventured to the Baltimore Zoo this weekend with friends.  I always love any visit to "Charm City," and the zoo was fantastic. 

Now, back to our regulatory zoo.

NCUA.  They released the agenda for this Thursday's NCUA Board Meeting.  I was expecting to see a CUSO rule, but it was nowhere to be seen.  Here are the items of interest:

1. Final Rule - Part 740 of NCUA's Rules and Regulations, Accuracy of Advertising and Notice of Insured Status.
2. Final Rule - Part 745 of NCUA's Rules and Regulations, Share Insurance and Appendix.
3. Final Rule - Part 750 of NCUA's Rules and Regulations, Golden Parachute and Indemnification Payments.
4. Proposed Rule - Part 705 of NCUA's Rules and Regulations, Community Development Revolving Loan Fund.
5. Voluntary Prepayment of Stabilization Fund Assessment.
6. Insurance Fund Report.

ALLL.  NCUA has released the agenda for an "Allowance for Loan and Lease Losses" webinar that will be held on May 26.   In NCUA's words:

The webinar will facilitate credit unions’ understanding of the 2006 Interagency Policy Statement on the topic. Credit unions have worked to understand how qualitative and environmental (Q&E) adjustments can better inform their estimates of inherent losses existing in the loan portfolio. The NCUA presenters will benchmark best practices in this area. The webinar will be interactive with opportunities for two-way communication.

I've said this before, and I'll say it again.  Regulators don't offer these webinars just for kicks.  They must see some problems or confusion in this area.  For that reason, find the person at your credit union responsible for the ALLL process, and make sure they know about this webinar. 

Term limits for directors.  We get quite a few questions each year about term limits for federal credit union directors.  The theory behind a term limit is that it forces turnover on a board.  Proponents of term limits say that such policies bring fresh ideas to a board that may have stagnated.  Opponents say such policies push great directors out the door for no reason.  NCUA's official position on this issue is clearly laid out in this legal opinion.   

It is our long-standing position that the only eligibility requirements for federal credit union board membership are those contained in the Act. That is, as long as an individual is a member of the FCU (Section 111 of the Act, 12 U.S.C. ~1761) and has not been convicted of a crime involving dishonesty or breach of trust (Section 205(d) of the Act, 12 U.S.C. ~1785(d)) (or if he has been convicted of such a crime, the NCUA Board has waived the Section 205(d) prohibition), he is eligible for election to the board of directors. Article VI, Section 7 of the Standard Federal Credit Union Bylaws permits an FCU's board of directors to set a minimum age requirement.

We have consistently rejected proposed nonstandard bylaw amendments or FCU policies that restrict completely any member's eligibility to run for the board of directors. In our view, such proposed bylaws and policies are impermissible because they serve as an absolute bar against an FCU member running for and serving on the board for a particular term, in conflict with the Act.

This does not, however, preclude an FCU's board and nominating committee from having a policy of nominating only individuals who have served less than three consecutive three year terms on the board of directors. Article VI of the Standard Federal Credit Union Bylaws gives the nominating committee discretion to set standards for determining which members it deems worthy of nomination. The FCU board can provide guidance on this policy. Thus, the nominating committee can have a term limit policy. However, all members other than those nominated by the nominating committee may run for the board by submitting the appropriate petition and/or by being nominated from the floor, whichever the FCU's bylaws allow. Individuals who are nominated by petition or from the floor are not subject to the nominating committee's standards, and may not be precluded from running for the board of directors as long as they meet the criteria specified in the Act and the FCU's bylaws.

There you have it.

Research Tip: Bylaws; Shameless Plug for Supervisory Committees

Posted by Anthony Demangone

I cannot tell you exactly how many times I researched bylaw issues this year, but it has been a bunch.  A federal credit union's bylaws touch upon so many important issues:

• Expulsion and limitation of services
• Elections
• Par value requirements for members
• How a credit union sets up its lending program
• Training issues
• Indemnification issues

I could go on, but I think you get the point.  With that in mind, here are a few things you should have handy.

1. A fresh copy of your FCU's bylaws.  You should have a hard copy near your desk or an electronic version saved to your computer.  NCUA allows a good deal of variety when it comes to bylaws.  A FCU is not required to adopt new provisions when NCUA issues a new set of standard bylaws, so you'll have to research your own set to get a definite answer for a given issue.
2. Familiarize yourself with NCUA's federal credit union bylaws web page.   This will have links to some of the more recent versions of NCUA's "model" or "standard" bylaws. 
3. There are also a good deal of bylaw amendment opinions located here.  If you search NCUA's website and select "legal opinion," these don't seem to pop up for some reason.  So it may be worth your time to review this area when researching a bylaws issue.
4. Finally, don't forget to research the issue searching through NCUA's legal opinion letters. 

Supervisory Committees.  Every credit union has a supervisory committee, but you don't hear a bunch about this important part of a credit union's corporate structure.  When NCUA issued its fiduciary duties rule, the fiduciary duties portion of the rule strangely didn't address duties for supervisory committee members.  When researching issues related to this committee, the Holy Grail continues to be NCUA's Supervisory Committee Guide.   Do your credit union a favor: Give every member of your credit union's supervisory committee a copy of this guide.  Print it out and give it to them in a binder.  In addition, you might want to send them the link to the guide that I provided in this blog post. 



Speaking of Supervisory Committee Members.   I always thought NAFCU could do more for supervisory committee members in the area of education.  Well, we finally devoted a large chunk of education time and resources for this important committee in this year's NAFCU Annual Conference.  You may want to forward this post to your supervisory committee members and have them review the educational sessions designed just for them. 

Robert's Rules of Order

Posted by Sarah Loats

Generally, the credit union's bylaws will determine the procedures of a meeting or election. Your credit union's bylaws should be some version of NCUA's Standard Bylaws. I've had a couple questions this week about meetings and elections, neither of which were answered by the Bylaws, so I thought I'd send along a little tip.

The Bylaws don't answer every procedural question, so where else can we look for our answers? NCUA legal Opinion Letter No. 97-0330 states that it is NCUA's policy to refer FCUs to Robert's Rules of Order when the bylaws are silent on a particular manner.

In addition, if your credit union has adopted NCUA's most recent version of the bylaws, you probably have a specific authority to refer to. This version of the bylaws direct credit unions to pick an authority to use for meetings of the members. Article IV, Section 4 states, in part:

"To the extent consistent with these bylaws, all meetings of the members will be conducted according to ________________________. The order of business for the annual meeting may vary from the suggested order, provided it includes all required items and complies with the rules of procedure adopted by the credit union.

The credit union must fill in the blank with one of the following authorities, noting the edition to be used: Democratic Rules of Order, The Modern Rules of Order, Robert’s Rules of Order, or Sturgis’ Standard Code of Parliamentary Procedure."

Having the a copy of the bylaws and a copy of Robert's Rules of Order or one of the other authorities listed above should prove useful in answering meeting and election questions that come your way.

Bylaw Supervisory Letter; Newsletter Available

On Friday, NCUA issued this Supervisory Letter regarding their move to reincorporate federal credit union bylaws into their rules and regulations.

Here's a few paragraphs that caught the Compliance Guy's attention:

"Under the risk-based examination system in use for FCUs, examiners do not currently, nor will they with the reincorporation of the Bylaws, inquire into an FCU’s bylaw disputes unless the FCU’s management raises the issue." (Taken from the cover letter.  This sounds good, right?)

"Any FCU member or FCU official may report a bylaw dispute within an FCU. Likewise, any FCU, member, or official may report a bylaw dispute to NCUA. FCU members still have the right to seek enforcement of the Bylaws in court. However, FCU members do not need to seek judicial relief before reporting a bylaw dispute to NCUA." (This was taken from the guidance itself, which doesn't sound as strong as the paragraph noted above.)

NAFCU members:  NAFCU has posted its Final Regulation on NCUA's Purchase, Sale and Pledge of Eligible Obligations.  NAFCU members can access it here.

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NAFCU members: the December 2007 newsletter is available here.

NCUA Board Meeting Agenda Set; Bylaws; Compliance and Dating

First off, NCUA has released the agenda for its December Board Meeting.  You can access it here.  (It appears fairly light to the Compliance Guy from a compliance point of view.)

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NAFCU members - we've published a Regulatory Final on NCUA's recent final rule that incorporates its bylaws into NCUA's regulations.  You can access it here.  (NAFCU member log-in needed.)

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OK, its Friday.  How about something a little bit lighter.  The Compliance Guy is getting married this May.  Therefore, my care-free, dating days are now behind me.  (Thank the Lord!) But those dating days really prepared me for compliance research.  Don't believe me?  Well, here's one dating/research connection.  I'll share others in future weeks.

Dating/Compliance Lesson #1.  Watch out for loaded questions
Most people are polite by nature. We prefer the oblique to the blunt and honeycombs to red vinegar. The women I date are no different.

They often ask one question, when they should be asking another.

What do you think about smokers? What do you think about dogs? What do you think about big families? These are all loaded questions. My date doesn’t really care what I think about smokers in general.

She wants to know if she can light one up after gulping down a $90 bottle of wine that the waiter said would complement her crab cakes.

As a compliance officer, you often are in the same boat. “Can we charge this fee?” upper management may ask. You may be tempted to serve up a yes or no answer, but be careful. The question is loaded. As a rule of thumb, I always translate “Can we charge this fee?” into “We’d like to charge this fee. We think we can do it this way. Can we? If we can’t, is there another way? Oh, and how will it affect the APR and our disclosure requirements? And is there anything else I forgot to ask?”

Carefully determine what management needs. A good compliance officer will ask questions and seek clarification. What is management trying to do, and what does it want? Until you truly answer those questions, your research efforts may go wasted.