Compliance Blog

“In an effort to illustrate the distinction between activities in connection and not in connection with lending, the preamble provided examples. The following were presented as being not in connection with lending: (1) Purchasing loan application forms from a company owned by an official; and (2) Financing a home (already) built by a construction company owned by an official. In contrast, the following were presented as being in connection with lending: (1) Obtaining a credit report from a credit bureau owned by an official; and (2) Referring a member to a construction company owned by an official to have a home built and financing the construction of the home.

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The Board continues to believe that the proposed prohibition would be easier to administer than the current regulation and has therefore retained it in the final rule. The Board acknowledges, however, that the examples provided were not helpful. Rather than trying to determine whether an activity is significant enough to be considered ‘‘in connection with’’ a loan, the Board has concluded that any activity that is directly linked to lending should be considered to be ‘‘in connection with’’ a loan. Under that analysis, each of the four examples discussed above involves an activity that is in connection with a loan.”

“SSHCU's original Management Team Bonus Program included incentives based upon SSHCU's ratios of loans to assets and delinquency. As you are aware, this is impermissible pursuant to Section 701.21(c)(8) of NCUA's Rules and Regulations which specifically prohibits federal credit unions from making any loans if, either directly or indirectly, any commission, fee, or other compensation is to be received by the credit union's management employees and loan officers.

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Section 701.21(c)(8) does leave room for some incentive pay. Any employee of the credit union, including senior management employees and loan officers, may receive incentive pay for activities not related to underwriting, insuring, servicing or collecting a loan made by the credit union. A review of the Revised Management Team Bonus Program indicates that bonuses are to be based solely on SSHCU's net return on average assets. This does not appear to violate NCUA's Rules and Regulations and, thus, would be within the discretion of SSHCU's board of directors.”

“You have asked whether the chairman of your federal credit union’s (FCU) board of directors, who is an attorney, may perform legal work for the FCU, being paid on a monthly retainer basis, including preparation of collection letters for delinquent loans. You have specifically requested an interpretation of the conflicts of interest provision in our lending regulation. 12 C.F.R. §701.21(c)(8)(i). Generally, an FCU’s outside legal counsel may serve on the FCU’s board but, like all directors, he or she may not participate in the deliberations or determination of any question affecting his or her pecuniary interest. Federal Credit Union Bylaws, Article 16, Section 4. Our opinion is that preparation of collection letters, whether payment is on a fee or retainer basis, is work in connection with a credit union loan and is impermissible under our lending regulation.

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The term official is defined in the regulation and includes directors. 12 C.F.R. §701.21(c)(8)(ii). Our interpretation is that the collection of delinquent loans, including the preparation of collection letters, is an activity in connection with lending.             

You have asked if the conflict of interest provision in the National Credit Union Administration’s (NCUA’s) general lending regulation would preclude a credit union from selling loans to a bank in which one of the credit union’s directors owns stock.  12 C.F.R. 701.21(c)(8).  We conclude the conflict of interest provisions prohibiting credit union officials from receiving any compensation in connection with making loans does not apply when a credit union sells loans it previously made but, nevertheless, we recommend that, in the circumstances you described, an interested director should recuse himself from deliberating or voting on the transaction.