Compliance Blog

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel, NAFCU

Many credit union staff are former bank employees. We forgive them for this because we’ve all made mistakes in our past.

The vast majority of substantive banking experience can be very helpful inside a credit union... most consumer regulations and many consumer financial industry standards are the same. However, there are two minor rules that apply to many banks that the NAFCU Compliance Team gets inquiries about regularly: Regulation O and Notices of Branch Closures.

Regulation O

Generally speaking, Regulation O (12 CFR Part 215) creates internal controls around insider loans, including additional due diligence, board responsibilities and aggregate limits. According to NCUA, the rule relies on public disclosure by banks as publicly traded institutions to deter improper insider commercial lending activities.

Regulation O actually does not apply to credit unions. Regulation O defines its scope as governing “extensions of credit made by a member bank to an executive officer, director, or principal shareholder of the member bank…” 12 CFR §215.1(b). A member bank is defined as any banking institution that is a member of the Federal Reserve System. See, 12 CFR §215.2(j). Since credit unions are not members of the Federal Reserve System, the requirements of Regulation O do not apply to them.

Instead, NCUA has its own rule, section 701.21(d), which provides the requirements for credit union loans to officials. The section, among other things, prohibits preferential treatment of officials, their immediate family members or anyone having common ownership, investment or pecuniary interest in a business with the official or their immediate family members. Further, section 723.7(a) out-rightly prohibits granting commercial loans to senior management employees or their immediate families if the employees are directly or indirectly involved in commercial loan underwriting, servicing and collection. It also requires that before a credit union makes any commercial loan to any compensated director, the board must approve granting the loan and the compensated director must recuse him or herself from that decision-making process.

So, while credit unions are not obligated to comply with Regulation O, NCUA has its own requirements and prohibitions on insider loans that credit union staff should be aware of.

Notices of Branch Closures

Under the Federal Deposit Insurance Act (FDI Act), 12 USC §1831r-1, any depository institution insured by the FDIC is required to provide notice to the OCC, the Federal Reserve Board, or the FDIC regarding any branch closings. In 1999, these agencies (plus the now defunct OTS) issued an interagency policy statement on branch closure notices. The rule requires 90 days prior notice to both the regulator and to the customers regarding the branch closure, and posting of the notice at least 30 days prior as well. These requirements do not apply in several situations, including relocations or consolidations of branches in the same neighborhood or temporary closures due to events beyond the bank’s control, for example, following a national disaster.

There is no regulatory requirement from NCUA to provide notice of a branch closure. However, that does not mean that credit unions do not provide any notice. From a reputational risk standpoint, the credit union may want to address service-related concerns, such as providing members with prior notice and/or offering alternative services where possible. While compliance with the policy statement’s customer notice requirements is not required by NCUA, it may still be a useful benchmark on how to approach closing a branch. Further, for state-chartered credit unions, the appropriate state authority often does have its own requirements regarding temporary or permanent branch closures. A credit union may wish to ensure any policies regarding branch closures address notice and service access concerns, applicable state law, as well as any safety and soundness concerns that might arise.