NASCUS Summaries NCUA 2012 Legal Opinions

NCUA 2012 Legal Opinions

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OGC Legal Opinion 11-0620 Multi-Featured Lending Plan
August 2012

NCUA's Legal Opinion 11-0620 addresses the permissibility of federal credit unions (FCUs) offering multi-feature lending (MFL) plans that contain both closed-end and open-end credit features under a combined umbrella agreement with the member. The issue of closed-end versus and open-end credit programs combined under an umbrella agreement arose subsequent to changes to Regulation Z’s open-end credit rules that became effective in 2010. These amendments prohibited the underwriting of individual advances under an MFL if those advances were linked to open-end disclosures.

NCUA determined the plan as described meets the regulatory requirements of Regulation Z.

NCUA's legal opinion was directed to FCUs because under Regulation Z NCUA only has enforcement authority for FCUs. The Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) share enforcement over state-chartered credit unions (SCUs).  However, SCUs should take note of NCUA's legal opinion as its rational and explanation could likely mirror the view of the FTC and CFPB.

The MFL plan presented to NCUA for review was designed to provide the FCU's members a streamlined borrowing capacity while allowing an FCU to underwrite individual, closed-end advance requests when appropriate. Under the plan, the FCU member signs an umbrella loan agreement at the time the plan is established. The initial umbrella agreement contains the general provisions of the credit and security agreement and terms governing future advancements.  The MFL plan is then comprised of sub-accounts for various loan products, some of which are open-end revolving credits and others that are closed-end credits such as vehicle loans. Once the MFL plan is established, members may request open-end or closed-end advances depending on their particular lending needs.

Members seeking the open-end replenishing accounts receive open-end disclosures in accordance with Regulation Z’s open-end credit rules. Once the line of credit is established, the FCU does not underwrite any particular advances.  However, the FCU may occasionally or routinely verify that the member’s credit standing has not deteriorated.  If the member's credit standing has not deteriorated  the member is entitled to advances without being underwritten or applying anew. If the member’s creditworthiness has deteriorated, the FCU can suspend the line, decrease the credit limit, increase the APR, or refuse any future advances.

Members seeking single-disbursement, nonreplenishing credit receive closed-end disclosures and must apply, and be approved, for the credit.

NCUA also noted that while these MFL plans meet the Regulation Z requirements, they must also be in compliance with any applicable state laws as well.

OGC Legal Opinion 11-1126 Appraisals for Member Business Loans (MBLs)
April 2012

NCUA's Office of General Counsel (OGC) published Legal Opinion 11-1126 to address appraisal requirements for member business loan (MBL) participations. Specifically, OGC was asked whether it is necessary for a credit union to obtain an appraisal for the sale of a participation interest in an MBL under the Interagency Appraisal and Evaluation Guidelines (Guidelines). The OGC's letter states that the Guidelines do not require an appraisal be obtained under the facts as presented. However, the OGC notes that purchasing credit unions should be performing risk assessments and due diligence on loans being purchased.

NCUA Rules and Regulations Part 722.3 establishes requirements for appraisals for "all real estate related financial transactions" except those transactions exempted per the rule. An exemption is established under the rule for a transaction that involves:

[T]he purchase, sale, investment in, exchange of, or extension of credit secured by, a loan or interest in a loan, pooled loans, or interests in real property, including mortgage-backed securities, and each loan or interest in a loan, pooled loan, or real propertyinterest met the requirements of this regulation, if applicable, at the time of origination.

NASCUS notes that state-chartered credit unions are directed to follow Part 722 by Part 741.203 of NCUA's insurance rules for state-chartered credit unions.

In the case of MBL participations, NCUA states that a reading of the rule, and the Guidance, indicates that the sale of a participation interest in an MBL secured by commercial real estate is exempt from the appraisal requirement provided the note met the regulatory requirements for appraisals at the time it was originated.

OGC does stress that credit unions should maintain risk management systems and policies that address the level of risk associated with loan participations. In addition, even though an exemption from the appraisal requirement may apply, NCUA may require a credit union to obtain an appraisal or evaluation when there are safety and soundness concerns on an existing real estate secured credit.

OGC Legal Opinion 11-0903 40-Year Real Estate Loan Modifications
February 2012

NCUA has received numerous inquiries regarding modifications of long term loans, specifically the 40-year maturity limitation established by NCUA rule Sec. 701.21(g). The rule does not apply to federally insured state-chartered credit unions. Federal credit unions (FCUs) have sought guidance on whether the term of a modified loan is determined from the date of modification or from the date of origination. In other words, FCUs were concerned that NCUA's 40-year maturity limit would encumber loan modifications if the modifications' maturity length was calculated from the inception of the underlying loan.

NCUA answered that a loan modification that renegotiates an existing loan conforms with the 40-year maturity rule if the original loan was originated with a maturity not greater than 40 years. NCUA OGC noted that Sec. 701.21(g) states: "A federal credit union may make residential real estate loans to members ... with maturities of up to 40 years." and stated that modifying an existing loan, it is not "making" a loan and therefore not counted toward the 40-year limit. However, term of the renegotiated loan cannot exceed 40 years from the modification date.

OGC Legal Opinion 11-1211 Separation and Release Agreement
January 2012

NCUA Office of General Counsel (OGC) was asked whether a federal credit union (FCU) could contractually prohibit a member from running for the board of directors or serving on the supervisory committee. NCUA answered "Yes" such an arrangement was permissible for FCUs under the Federal Credit Union Act (FCUA).

In the case before NCUA, a former employee of a FCU was offered Separation and Release Agreement (Agreement) that offered a lump sum payment and the opportunity to have their personnel file reflect that they resigned rather than that they were terminated. The offer of the Agreement was conditioned on the former employee consenting to keeping certain matters confidential, releasing the FCU from any claims, and refraining from seeking election or accepting appointment to the FCU's board of directors or supervisory committee for five years from the separation date.

While the former employee believed that the conditions would violate their rights as FCU member, OGC disagreed stating that while the FCUA prohibits some limits on members' rights, members could waive rights under contract n exchange for some consideration. NCUA further states that the legal validity of the contract was a matter of state law.

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