Compliance Blog

Good morning from NAFCU's Regulatory Compliance School being held in San Diego! As we get back to the basics at School, let's have a look at a handful of regulations that many compliance officers may not visit often, but the NAFCU Compliance Team get frequent questions about: NCUA's rules on making loans to directors and staff.

Board Review

Section 107 of the Federal Credit Union Act and its implementing regulation in section 701.21 contain requirements that may apply if a director, a member of the supervisory committee, or a member of the credit committee is taking out a loan at the federal credit union where he or she serves.

The initial approval of the loan can be performed by a loan officer or the credit committee, pursuant to the credit union's bylaws. But, if the aggregate of the amount of all loans to the individual director or committee-member exceeds $20,000 plus pledged shares, the board itself must approve the loan. The same rule applies if the director is just going to serve as endorser or guarantor for another borrower.

The federal credit union is required by section 701.21(d) to establish procedures for performing the aggregate calculation to determine whether board approval is required. If, after combining the amount of the loan applied for with all outstanding loans and lines of credit (including unused available balances) to the director, and subtracting any pledged shares, the aggregate amount is over $20,000, then the board must review and approve the loan before the federal credit union can make it. This review is non-delegable. We have previously had a few credit unions ask whether the director or committee member's loan balances and the math involved in the calculation must be reported to the board. There is no requirement in NCUA regulations or guidance that indicates that credit union staff must show their math to the board.

Non-preferential Treatment

All federally-insured credit unions must comply with the requirement of non-preferential treatment found in section 701.21(d)(5). See, 12 C.F.R. § 741.203(a). Any loan made to a director, a supervisory committee member, or a credit committee member cannot have more favorable rates, terms or conditions than those available to other credit union members. This prohibition also extends to the volunteer's spouse or family members in the same household as the volunteer. It also extends to business or investment partners of these volunteers, or the family of those partners.

The prohibition does not extend to staff. Both staff and senior management may enjoy employee rates and other discounts, if the credit union offers them. However, if staff serves on the board or on the supervisory or credit committees, they cannot enjoy these discounts by virtue of their board or committee seat.

Commercial Loans

Section 723.7(a) has its own restrictions on who can obtain a commercial loan at a federal credit union. Any compensated director is prohibited from obtaining a commercial loan from the federal credit union unless the board of directors approves it. The compensated director must recuse himself or herself from any deliberations regarding the loan.

Further, neither senior management involved in commercial loan underwriting, servicing or collection, nor their family, nor those associated with them under the definition in that section, can obtain a commercial loan either.

State-chartered credit unions are exempt from the requirements of Part 723 if NCUA has determined that they are subject to substantially equivalent regulations.

Conflicts of Interest

One other thing to keep in mind is the general prohibition against conflicts of interest found in Article XVI, Section 4 of NCUA's Federal Credit Union Bylaws. See, 12 C.F.R. Part 701, App. A. The provision prohibits directors, committee members, officers, agents or employees from participating in the deliberation of any question affecting his or her financial interests, including through corporations or other organizations they may belong to. The bylaws describe an appropriate procedure for avoiding a conflict of interest in these situations:

"In the event of the disqualification of any director respecting any matter presented to the board for deliberation or determination, that director must withdraw from the deliberation or determination; and if the remaining qualified directors present at the meeting plus the disqualified director or directors constitute a quorum, the remaining qualified directors may exercise with respect to this matter, by majority vote, all the powers of the board. In the event of the disqualification of any member of the credit committee, if applicable, or the supervisory committee, that committee member must withdraw from the deliberation or determination."