Recent Legal Developments for Credit Unions

Thomas H. Wolfe
December 16, 2010 | COMMENTS

In the last few years, several credit unions have challenged IRS Techni­cal Advice Memoranda (private letter rulings) regarding UBIT and received favorable rulings. On October 19, the IRS announced it would not appeal one such ruling of the U.S. District Court in Colorado in favor of Bellco Credit Union. The court held that com­missions from the sale of financial products through CUSO Financial Services, credit life, credit disability, and accidental death and disability insurance were “substantially related” to the credit union’s tax-exempt purpose and not subject to UBIT. Last year, the IRS chose not to appeal a Wisconsin district court decision in favor of Community First Credit Union exempting income derived from the sale of credit life, credit disability, and GAP insurance. This is encouraging news for credit unions and another positive step toward final resolution of the UBIT issue.

Free Coin Sorting Service as Incidental Power
NCUA Legal Opinion Letter No. 10-0756 (09-22-10)

A federal credit union (FCU) may offer free use of its coin sorter machine to non-member non-profit organizations in one of two ways. Under its incidental powers author­ity, FCUs may engage in marketing activities designed to attract or retain members or encourage use of FCU products and services (12 C.F.R. §721.3(h)). FCUs may also make charitable contributions or donations to non-profit organizations located in, or conducting activities in, a com­munity where the FCU has a place of business (12 C.F.R. §701.25).

Long-Term Principal Residence Loans
NCUA Legal Opinion Letter No. 10-0729 (09-08-10)

A federal credit union may make more than one first-lien, long-term residential mortgage loan (maturity up to 40 years) to the same member if the loan is for the member’s principal residence or intended for a future principal resi­dence, such as a retirement home. It can qualify even if it is fully or partially rented out in the interim for invest­ment purposes. Additional real estate secured loans would be subject to the maturity limits and other provisions of NCUA’s general lending rules (12 C.F.R. §701.21) and/or member busi­ness loan rules (12 C.F.R. Part 723). Because a member may only have one principal residence at a time, a long-term loan to finance a secondary principal residence is not permitted.

Member Business Loan Secured by Third Party Primary Residences
NCUA Legal Opinion Letter No. 10-0312 (04-29-10)

A federal credit union that makes a line of credit to a member bor­rower (company) that meets the criteria for a member business loan (MBL) is not within the exception to the MBL rule if it is secured by a lien on a one-to-four-family dwelling. The excep­tion for an MBL secured by a one-to-four-family dwelling only applies if it is the primary resi­dence of the member (12 C.F.R. §723.1(b)(1)). The fact that the company will ultimately sell the secured property to a member under a separate loan agreement does not change this result.

"Floor" Rates on Home Equity Loans
NCUA Legal Opinion Letter No. 10-0214 (03-03-10)

An FCU may add a fixed mini­mum or “floor” rate to an existing variable-rate home equity loan only if: the original agreement disclosed the possibility and any associated trigger­ing event; or the borrower agrees to it in writing. An FCU generally cannot change the APR on a home equity plan after it is opened unless the plan has a variable rate and the change is based on a publicly available index that is not under the FCU’s control (12 C.F.R. §226.5b(f)(1)). However, rate changes disclosed in the agreement (stepped-rate or preferred rate plans), or rate changes by written agreement, are permissible.

This article was reprinted with permission from Credit Union Digest, the publication of the California and Nevada Credit Union Leagues (www.ccul.org).