Recent NCUA Legal Opinion Letters

Thomas H. Wolfe
October 21, 2009 | COMMENTS

The following is a synopsis of recent legal opinion letters issued by the NCUA Office of General Counsel affecting federal credit unions:

Application of State Law to Guaranteed Auto Protection (GAP) Waivers

Legal Opinion Letter No. 09-0218 (Feb­ruary 24, 2009)

Offering GAP waivers, and deriv­ing an income from same, is a permis­sible loan-related activity for federal credit unions under the incidental powers rule, regardless of any state law limitations. A GAP waiver is an agreement affecting the terms of a loan repayment, so any state law purporting to limit or affect an FCU's ability to offer or administer such a product is expressly preempted by NCUA's lending regulation. NCUA has previously concluded that debt cancellation contracts, including GAP waivers, are not insurance products and that offering them is not engaging in the insurance business.

Board Vote on Charter Amendment

Legal Opinion Letter No. 09-0238 (March 6, 2009)

Under Article XVI, §4, of the FCU Bylaws, a director must not participate in the decision-making process on a matter before the board when it conflicts with that director's financial or personal interest. A mere affiliation with an entity at issue is not sufficient to disqualify a director from a board vote unless he or she would receive any personal or financial benefit from the outcome. In addition, a charter amendment requires an affir­mative vote of two-thirds of the total authorized number of members of the board, as opposed to two-thirds of the qualified directors eligible to vote.

CUSO Purchase and Servicing of Non-Performing Loans

Legal Opinion Letter No. 09-0349 (May 18, 2009)

A CUSO engaged in the purchase and collection of nonperforming loans under 12 C.F.R. §712.5(j)(5) can restructure delinquent debts that it owns so long as the credit union made the original underwriting decision and no new credit is being extended to the borrower. Permissible changes could include changing the term, payment schedule, or interest rate. CUSOs remain prohibited from originat­ing new consumer loans other than credit card lines of credit, residential mortgage loans, and student loans. A CUSO should not restructure a loan in any manner inconsistent with FCU lending restrictions.

Shared Appreciation Loan Modifications

Legal Opinion Letter No. 09-0426 (May 28, 2009)

FCUs may offer shared appre­ciation loan modifications, provided they are handled in a safe and sound manner and reported on the NCUA 5300 report. Shared appreciation loan modifications are a matter of contract between an FCU and the individual borrower and a permissible exercise of an FCU's contracting author­ity. It is important to consult with a competent tax adviser regarding any potential tax implications.

Investment Advice Services

Legal Opinion Letter No. 09-0511 (June 3, 2009)

Although an FCU can offer financial counseling, an employee cannot provide investment advice that would subject either the employ­ee or the credit union to federal or state securities laws as an investment advisor. The Investment Advisors Act defines an investment advisor in 15 U.S.C. §80-2(a)(11) as: “any person who, for compensation, engages in the business of advising others … as to the value of securities or as to the advisability of investing in, purchas­ing, or selling securities” and they are subject to SEC registration and regulation. However, an FCU may:

• Establish a shared employee arrangement with a third-party registered investment adviser where the employee provides investment advice exclusively on behalf of and under the control of the third party, as long as this arrangement is clear.
• Act as a finder or offer invest­ment adviser services through a CUSO under the inciden­tal powers rule in 12 C.F.R. §721.3(f).
• Own a CUSO that provides investment adviser services, which may also require registra­tion as a registered investment advisor.

Requirement to Advertise Abandoned Property

Legal Opinion Letter No. 09-0621 (July 7, 2009)

The fixed asset rule requirement in 12 C.F.R. §701.36(b)(3) that an FCU “publicly advertise” property for sale after it has been “abandoned” for four years is generally met by listing the property for sale with a commer­cial listing service and posting a “for sale” sign in front of the property. The requirement to make diligent efforts to dispose of and seek fair market value for abandoned property may require additional actions depending on loca­tion and circumstances.

Thomas H. Wolfe is an attorney with Thomas H. Wolfe, PC and is retained counsel for the California and Nevada Credit Union Leagues. This article was reprinted with permission from Credit Union Digest, the publication of the California and Nevada Credit Union Leagues.