NCUA 2017 Legal Opinions

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OGC Legal Opinion 17-0670
Authority to Issue and Sell Securities

June 2017

NCUA has issued a legal opinion regarding federal credit union (FCU) authority to issue and sell securities under the Federal Credit Union Act (FCUA).

The opinion applies only to FCUs. Federally insured state chartered credit unions (FISCUs) look to state law for authority to issue or sell securities. As of 2014, the last time NASCUS surveyed the question, 10 states allowed FISCUs to issue or sell securities and 19 states did not.

NCUA’s General Counsel (GC) concluded that FCUs have the authority to issue and sell securities pursuant to “incidental powers” provisions of § 1757(17) of the FCUA and Parts 721.2 & 721.4 of NCUA’s rules. The GC also noted that in the case of Government National Mortgage Association (Ginnie Mae) securities, FCUs have express authority pursuant § 1757(7)(E) to issue and sell securities guaranteed pursuant to the National Housing Act.

With respect to the incidental powers finding, NCUA’s General Counsel traced the legal evolution of the standard for determining incidental powers for national banks, noting that this is the standard courts have acknowledged as proper for FCU incidental powers.

The current standard, elucidated by the U.S. Supreme Court in 1995, holds that incidental powers are separate and apart from the core “banking” powers. In Nations Bank of North Carolina v. Variable Annuity Life Insurance Co. (VALIC), the Court stated that regulators have discretion to authorize activities beyond those specifically enumerated in statute. Following that standard, NCUA has promulgated a 3 prong test for an incidental power. Part 721.2 provides that an activity is an “incidental power,” even if not expressly authorized under the FCUA or NCUA’s regulations, if it:

  • Is convenient or useful in carrying out the mission or business of credit unions consistent with the [FCUA];
  • Is the functional equivalent or logical outgrowth of activities that are part of the mission or business of credit unions; and
  • Involves risks similar in nature to those already assumed as part of the business of credit unions

NCUA has determined that issuing and selling securities meets all three of the § 721.2 criteria and therefore qualifies as an incidental power for FCUs. However, because the power is not an enumerated incidental power, FCUs must obtain prior approval before engaging in the activity.

NCUA notes that FCUs must also comply with all safety and soundness requirements. FCU management must ensure “its policies for securitizing assets are realistic and carefully designed to enable the FCU to serve the interests and needs of the membership.” In addition FCUs must:

  • Provide direction and instruction for officers, employees, and committees delegated the responsibility for implementing securitization activity
  • Ensure compliance with applicable federal and state securities laws
  • Develop proper internal safeguards, internal controls and quality controls
  • Exercise due diligence before devoting resources to a new activity or entering into any arrangements with 3rd parties
  • Examine the credit, liquidity, reputation, operational, and strategic risk involved in asset securitization activities

OGC Legal Opinion 17-0406
Contiguous Geographic Coundaries
March 2017

This Legal Opinion from NCUA applies only to FCUs.

NCUA was asked if it would consider several Hawaiian Islands contiguous for purposes of NCUA's rural district regulation, despite the fact that islands are separated by water. For the narrow purposes of defining a contiguous community for FCU FOM purposes, NCUA determined that the Hawaiian Islands were in fact a contiguous rural community.

For a rural district to qualify for FCU field of membership it must meet the following requirements:

1) The proposed district has well-defined, contiguous geographic boundaries;
2) The total population of the proposed district does not exceed 1,000,000;
3) Either more than 50% of the proposed district’s population resides in census blocks or other geographic units that are designated as rural by either:

  • the CFPB
  • the United States Census Bureau
  • the district has a population density of 100 persons or fewer per square mile

4) The boundaries of the well-defined rural district do not exceed the outer boundaries of the states that are immediately contiguous to the state in which the credit union maintains its headquarters

NCUA’s determination that the Hawaiian Islands in questions satisfied the FCU FOM requirements was based on the fact that the islands satisfied the population, population density, and perimeter criteria as established by NCUA regulations.  With respect to the contiguous nature of the request, NCUA reasoned that bodies of water do not serve to separate the abutting land. NCUA bases this reasoning on the fact that nothing in its statutes identifies bodies of water as representing boundaries, and that the Metropolitan Statistical Areas (MSAs) transcend bodies of water.

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